Russian RetributionFebruary 27, 2008; Page A16Lev Ponomarev is a well-known Russian human-rights activist. So you can guess where this story is going.

On Friday, Mr. Ponomarev, a former aide to Soviet dissident Andrei Sakharov and a colleague of opposition leader Garry Kasparov, was charged with criminally "slandering" General Yuri Kalinin, who runs Russia's Federal Penitentiary Service. Mr. Ponomarev has been calling attention to the often brutish treatment of prisoners in Russia's roughly 700 penal colonies, some 50 of which have acquired reputations as "torture colonies." He now is required to get government permission to leave Moscow. If convicted, he could face up to three years in a penal colony.

Officially, the charge concerns statements by Mr. Ponomarev about Mr. Kalinin from November 2006. But this looks to be a case of retribution for comments Mr. Ponomarev made during a two-week tour of the U.S. this month, particularly to this newspaper. In a February 12 column "Putin's Torture Colonies," our Bret Stephens quoted extensively from his interview with Mr. Ponomarev; the column also referred readers to a YouTube video showing what appears to be Russian guards violently abusing their prisoners. Mr. Stephens's column was translated and reprinted in the Russian media, while the video has disappeared from YouTube.

Whether there is a link among our reporting, the vanishing video and Mr. Ponomarev's legal jeopardy is a matter of speculation. But it says something about the way Russia is governed today that it is now all too easy to believe that political retribution is afoot. That bodes ill for Mr. Ponomarev, and for the causes of human rights and democracy that he courageously represents.

Dmitri Medvedev started out with a bang on his first day on the job as Russian president-elect, with European leaders waking up on Monday to the news that Russia had cut natural gas supplies to Ukraine by 25 percent.

Of course, state-controlled gas monopoly Gazprom — which Medvedev chairs — said the move had absolutely nothing to do with Europe, and that it was just part and parcel of the insufferable energy issues Gazprom has with Ukraine. But that explanation is unlikely to assuage the Europeans; they heard the same story from Moscow when a Russian natural gas cutoff turned out their lights in January 2006.

Related Special Topic PagesRussian Energy and Foreign Policy Gazprom’s Ascent The Russian Resurgence In Stratfor’s eyes, though this Russian power play was a long time coming, Russia’s timing could not have been more perfect. In Moscow’s eyes, European recognition of Kosovar independence despite vehement Russian objections represented both a threat to Russia’s regional prowess and an opportunity to reassert Moscow’s authority in the Russian periphery. From the Russian point of view, Europe had to be taught a hard lesson that would be felt where Russia holds the most leverage — namely, in the Balkans, the Caucasus, Ukraine and the Baltic states.

We already are seeing the Russian strategy take effect. Immediately following Kosovo’s declaration of independence, we saw flames in the Balkans as Serbs in Kosovo and Bosnia began indicating they might follow the Kosovar precedent and secede to join a Greater Serbia. To the east, the Russian-sponsored Georgian separatist region of Abkhazia began mobilizing troops late last week, spelling trouble for the powder keg that is the Caucasus. On Monday, we saw the Ukrainians get a kick in the pants with Gazprom’s natural gas cutoff. And the Balkans, aware of what is likely heading their way, are simply trying to stay under the Russian radar. All these moves gradually are giving Medvedev the prestige he needs in his symbolic takeover of the Russian presidency.

The country to watch now is Germany. When the Russians turn the screws on Ukraine, the Germans feel the pain. In addition to having 30 percent of its natural gas supplies from Russia transit Ukraine, Germany must fulfill its role as the regional heavyweight capable of standing up to an aggressive Russia hovering to the east. But before Germany can deal with the Russians, it needs to get the European house in order — and that means dealing with the other European heavyweight, France.

France and Germany’s clashing views on Europe are coming to a head for the first time in decades. With France making preparations to take the EU presidency in four months, contentious issues ranging from French debt to immigration to a major French push for a Mediterranean Union now are rearing their heads, threatening the Franco-German harmony that binds the European Union. Fortunately for Moscow, this historic Paris-Berlin fault line has re-emerged just in time for the Russians to exploit.

With the Russians getting ready to rumble, the Germans don’t have time to quarrel with the French. The German priority now is to rally a united European front before it heads into negotiations with Russia, and this is exactly what German Chancellor Angela Merkel had on her mind when she sat down for a hastily arranged dinner with French President Nicolas Sarkozy on Monday night. For now, it appears as if the Germans and the French have made up. Sarkozy and Merkel came out of their meeting with an ambiguous message that they had compromised on the Mediterranean Union project, probably shelving their issues for another day.

Right now, Merkel has bigger fish to fry in Moscow, where she will be traveling this weekend to meet with Medvedev (and though officially not on the agenda, with the real power player, Putin). The message she would like to deliver in Moscow is that Europe is rallying behind her to counter Russia’s payback plan over Kosovo. But the Russians aren’t easily fooled. There is more time for this game to play out, and the Russians appear to be pacing themselves carefully.

Geopolitical Diary: Ukraine's NATO About-faceMarch 7, 2008Ukraine made a radical policy adjustment on Thursday by essentially ending its bid for NATO membership. The move, which would have been unthinkable as recently as a month ago, probably resulted from external forces, namely Russia. Ukraine’s abrupt departure from its long-standing bid indicates the ominous involvement of Moscow. In its effort to maintain its security buffer, Russia probably employed its FSB security services.

Related Special Topic PagesThe Russian Resurgence Russian Energy and Foreign Policy States possess numerous tools to cause another state to change tack. These include economic leverage, political influence and/or military pressure.

Economic tools can include fostering closer integration, raising or lowering barriers to trade, embargoing another country, threatening to undermine a country’s financial stability by mass sales of its currency, or by simply shelling out cash. In the case of Ukraine –- and by extension, Western Europe –- Russia frequently has employed natural gas cutoffs.

Political tools are varied, and focus on finding political weak spots for later manipulation. The options include promoting closer integration among citizens with a common heritage found in both of the countries in question. These ties can then be manipulated later. For example, one country can threaten to intervene in the other to protect an allied ethnic group from alleged discrimination. Russia could employ this tactic in relation to ethnic Russians living in Ukraine.

Military tools to influence another state’s behavior include the threat of invasion, conspicuously aiming weapons — anything from artillery to intercontinental ballistic missiles (ICBMs)— at the other country, or providing military assistance to the government or the opposition groups in the other country. Russia’s Feb. 12 threat to aim ICBMs at foreign forces that might deploy in Ukraine falls in this category.

The 1989 collapse of the Soviet Union and Russia’s subsequent loss of influence in its near abroad and in the West laid the foundation for Russia’s current geopolitical trajectory. Russia’s resurgence under President Vladimir Putin has involved a strong effort to regain the influence, respect and national security it believes it is due. Moscow’s desire is especially keen given previous Russian humiliations — particularly those suffered by the government of the late Boris Yeltsin, when the West encroached on what Russia perceives as its prerogatives. Russia, however, lacks many of the tools the Soviet Union had at its disposal for compelling other countries’ behavior. This complicates Putin’s effort to satisfy the Russian geopolitical imperative of establishing hegemony in its near abroad.

The Russian resurgence took a potentially fatal hit over Kosovo’s Feb. 18 secession from Serbia. This was an issue of minor importance to the United States and most Western European countries, but a major threat to Russia’s effort to demonstrate its return to major power status. For Russia and Putin to survive the Kosovo insult, retribution elsewhere in the Russian near abroad was expected — namely in the Caucasus, Ukraine, Belarus and the Baltic states.

Ukraine’s dramatic about-face on NATO comes in the context of Kosovar independence. Ukraine’s pro-Western president, Viktor Yushchenko — who came to power in his country’s 2004 Orange Revolution — was clamoring as recently as a month ago for NATO membership, despite a lukewarm reception from the alliance. Rumor has it that Yushchenko’s sudden change at the NATO foreign ministers’ meeting in Brussels occurred after the Russian president literally ordered him to withdraw Ukraine’s NATO bid, probably reminding him of the aforementioned Russian economic leverage over Ukraine.

Putin likely did not rely on economic coercion alone, however, and we can assume the FSB helped change Ukraine’s mind on NATO. The FSB is quite good at pressuring individuals using threats, intimidation, enticements and even sophisticated assassinations. Yushchenko knows the capabilities of the secret service underworld well, having barely survived a poisoning while seeking office in 2004.

Russia and the FSB probably decided that bringing the existing Ukrainian leadership in line would be easier than introducing a new leadership, allowing Moscow to avoid the pitfalls of Ukrainian politics. Given the lukewarm reception to Ukraine’s membership bid, Kiev could simply have let its application fall by the wayside. Instead, it made an active policy reversal. Compelling Yushenko’s U-turn on Ukraine’s NATO bid thus represents a significant Russian achievement, one that others — particularly Georgia — will observe closely.

Russian Ambassador to NATO Dmitry Rogozin said March 11 that Georgia’s South Ossetia and Abkhazia regions will secede if Georgia becomes a member of NATO, Reuters reported. Rogozin said that Abkhazia and South Ossetia “do not intend to join NATO.”

Stratfor I think has had good insight in its assessment of what Russia is up to geopolitically, and continues to have it here. That said, I would quibble with the final sentence. The Russians have been fcuking with us by helping Iran and now we are showing them that there are costs to that. That certainly does not make us the confrontational one in my book.=====================

Geopolitical Diary: U.S. Puts Russia On NoticeMarch 20, 2008U.S. President George W. Bush, fresh from meetings with Georgian President Mikhail Saakashvili on Wednesday, announced American support for Georgia’s NATO bid. Specifically, Bush announced that he would lobby the NATO allies to grant Georgia a Membership Action Plan (MAP), the first step toward joining the alliance. Bush’s statement contained sufficient equivocation that MAP is hardly a foregone conclusion and formal membership is anything but imminent, but Russia has nonetheless been put on notice. NATO is preparing to march east yet again.

For the past month the West and Russia have been at a crossroads. After 10 years of heavy investment of political capital by the Kremlin into supporting its Balkan ally, Serbia, the West ran roughshod over Russian concerns by recognizing the independence of Kosovo, a renegade Serbian province. That decision blew a hole through the image of Russian power. In the midst of an internal transition of power and reeling from the Kosovo defeat, Moscow needs a means of striking back at the West to demonstrate its potency. To flex its muscles, Russia can encourage separatism in U.S. allies, complicate the United States’ Middle East policy with selective weapons sales and technology transfers, and manipulate European energy supplies.

But Russia also knows that if it makes any missteps, Western influence could threaten its position on more fronts than the country can defend. Even with high energy prices bolstering its bottom line and a strong president holding the system together, the Kremlin knows Russia is but a shadow of its Cold War self. Meanwhile, it is not that the West is without vulnerabilities — weaknesses are available for exploitation from Finland to Turkey — but that during the last 18 years, Western institutions have only strengthened in absolute terms.

The West has the advantage of political, economic and military superiority, along with the flexibility to dabble anywhere along the Russian periphery, and with a little elbow grease and luck, even within the Russian Federation itself. Remember, it is Russia — not the United States — that is riddled with potential secessionist regions. And it is the United States — not Russia — that sits safely on the other side of an ocean from its potential competitors.

In short, there is no doubt in either Moscow or Washington that the two share the ability to swap blows in areas of critical importance. Efforts undertaken March 17 and March 18 saw a final attempt to head off a post-Kosovo confrontation when U.S. Secretary of State Condoleezza Rice and Secretary of Defense Robert Gates traveled to Moscow to determine whether the Russians and Americans could agree to disagree.

In the American mind, a Russia that agrees to sit on its hands while the United States sews up Iraq is preferable. And yes, we realize that “sew up” is a gross simplification even in the best of circumstances. Moscow’s position in the talks was more nuanced than Washington’s: Moscow offered to hold off on seeking retaliation for its defeat in Kosovo should the United States agree to hold off on pushing its NATO agenda deeper into the former Soviet Union. Ultimately, the two sides proved unable to hammer out a deal, and Bush’s statement is the proof that, for the Americans at least, confrontation is the order of the day.

Geopolitical Diary: The Start of Cold War II?March 21, 2008Legislators in the Georgian breakaway republic of Abkhazia signed a statement on Thursday accusing Georgia of aggression and warning of the possibility of war in the Caucasus. In Moscow, the Russian parliament urged the government to send additional peacekeepers to both Abkhazia and Georgia’s other breakaway republic, South Ossetia. Elsewhere, the Kremlin’s NATO envoy said Russia wants an emergency meeting with the Western military alliance to discuss the March 19 move by U.S. President George W. Bush to establish Kosovar eligibility for military assistance from the United States.

These developments follow a series of similar events in the past few weeks, underscoring an escalation of tensions between the United States and Russia in the wake of Kosovo’s Feb. 17 declaration of independence. The flurry of activity includes moves to expand NATO, violent reactions from Kosovar Serbs, the U.S. attempt to construct ballistic missile defense installations in Eastern Europe, and Russia’s apprehension of Western spies in Moscow. All these events clearly underscore that the Cold War is back.

Cold War II is different than the original Cold War, which was a Soviet-U.S. confrontation that lasted from the end of World War II to the collapse of the Soviet Union in 1991. Nuclear-armed ideological rivals Washington and Moscow competed for global influence, and a divided Europe was a key theater in which this war played out. Cold War II is being waged by a far more powerful United States and a vastly weakened Russia — an emasculated successor to the Soviet Union.

Another key difference between the new and old Cold War is that Europe no longer is just a theater in which the Americans and Russians are playing geopolitical chess. The Europeans are playing major roles as independent actors in this new Cold War. This time around, Europe as a continent is not exactly occupied and has recovered from both World War II and the first Cold War. But the European Union is an increasingly incoherent entity, with the three principal state actors –- Germany, France and the United Kingdom –- not interested in confronting Russia.

Berlin made this very clear when it expressed a lack of interest in NATO expansion, the independence of Kosovo and the Ukraine gas issue. This is not surprising, given that the Germans are dependent upon Moscow for energy. Beyond energy, Germany’s wider economic relationship with and its proximity to Russia inform its lack of appetite for confrontation with the Kremlin. But this does not mean that Berlin won’t take on Moscow when it deems necessary. Germany is re-emerging on its own to again become an international power player.

France is even further removed from the new Cold War dynamics. Paris has its own ideas about how it wishes to advance itself as an international player, which has very little to do with West vs. Russia competition. Geographically far more insulated, it wants no part in this new Cold War.

As for the British, they have enough domestic political issues to sort out, which is why they also are out of the game. That said, given London’s historic role as a major U.S. ally, the United Kingdom cannot avoid the issues that the United States is dealing with. Therefore, at best the British will maintain a low-key role in the U.S. moves to continue its geopolitical push against Russia.

The United States — considering that it has the luxury of waging a geopolitical assault against Russia from afar — is not bothered by the lack of European involvement. But the European position is not tenable in the long run. Europe’s geography — and the fact that, unlike during the original Cold War, there isn’t an iron curtain in place — will force the Europeans to jump in or at least choose sides.

SummaryTurkmen President Gurbanguly Berdimukhammedov will become the first Turkmen leader to attend a NATO summit when he goes to the alliance’s upcoming heads-of-state meeting in Bucharest, Romania, on April 2-4. The move indicates that Berdimukhammedov is looking to balance his country between the West and Russia while both sides try to pull Turkmenistan off the fence.

AnalysisTurkmen President Gurbanguly Berdimukhammedov will attend NATO’s April 2-4 heads-of-state summit in Bucharest, Romania. This will be the first time a Turkmen leader has attended a NATO summit and it indicates that Berdimukhammedov is not as afraid of the West as his predecessor was. Moreover, it shows that Berdimukhammedov is looking to balance his country between Russia and the West, even as both sides are tugging at Ashgabat.

In December 2006, the Turkmenbashi (Turkmen President Saparmurat Niyazov) died, leaving the country’s path unclear. Turkmenistan’s entire existence had hinged on the Turkmenbashi and his quirky but highly repressive means of running the country. Since his death, there has been a large battle among five forces — the United States, Europe, Russia, China and Iran — over who will dominate Turkmenistan’s wealth of energy supplies. Though each player has made small deals, none has really solidified an alliance with Ashgabat or Berdimukhammedov, who acts as if he is open to any of the powers’ investments.

Turkmenistan has remained neutral since the end of the Soviet Union. It is an unofficial observer of the Shanghai Cooperation Organization (SCO), and Niyazov signed a Partnership for Peace agreement with NATO in 1994.

Though Turkmenistan is an unofficial observer of the SCO, it has routinely attended almost all of the organization’s meetings, since most of Turkmenistan’s economic partners and regional countries are in the SCO. Ashgabat’s relationship with NATO, on the other hand, has been very precarious. Niyazov only signed the agreement with NATO to try to control the Mary Clan, the most powerful clan in Turkmenistan and the group that controls drug trafficking in the country.

Niyazov was also a supporter of the 2001 war in Afghanistan launched chiefly by the United States, though that support stemmed from his fear that Afghanistan’s instability would spill over into his controlled country. But the Iraq war deeply affected Niyazov and the rest of the Turkmen government, especially regarding their view of the United States. The 2003 Iraq war was, in Niyazov’s mind, about the United States going in to overthrow a very familiar-looking government. After Saddam Hussein was removed from power — and particularly after Libya’s Moammar Gadhafi reached a rapprochement with the United States — Niyazov became convinced that he was the next target on Washington’s to-smite list.

In addition, there was a wave of “color” and “velvet” revolutions that began in Serbia in 2000, swept Georgia in 2003 and Ukraine in 2004, and finally reached the Central Asian countries Kyrgyzstan and Uzbekistan in 2005. Not only was the Turkmenbashi terrified that the West — which was accused of sparking the revolutions — would attempt one in his country, but he knew that his country would be more vulnerable to such a revolution because it had a far more brittle power structure and weaker security services than the other countries.

This all led Niyazov to sign a rather comprehensive defense agreement with Moscow that abandoned Ashgabat’s previous policy of utter neutrality and placed Turkmenistan back under Moscow’s security umbrella.

However, Berdimukhammedov is a more level-headed leader and is making his own decisions.

The new leader has opened his country up to proposals from all sides over developing Turkmenistan’s large energy reserves. However, Berdimukhammedov has been very cautious and conservative in deciding which deals to take, with proposals from Europe, Russia and China all on the table. Berdimukhammedov has also been asserting his country’s place as a global energy supplier by confronting the countries to which it sends supplies. In December 2007, Turkmenistan announced that it was doubling the price of natural gas to Russia, and in January it cut natural gas supplies to Iran.

In security and military matters, Berdimukhammedov had been pushing his country toward Moscow. At the last SCO meeting, Berdimukhammedov discussed the possibility of becoming a recognized observer or even a member. Also, the leader has made a military upgrade one of his country’s top priorities. Turkmenistan currently has a slew of unused military bases left over from the Soviet era, and because Turkmenistan is next to Iran and Afghanistan, Moscow and Washington are fighting over those bases. But Ashgabat wants more than either side is currently offering and recently asked Moscow to help it carry out a military upgrade, primarily for its air force.

But Moscow has yet to decide whether it will arm a country that has been growing closer to the West, especially if Ashgabat is only going to give Moscow a harder time over energy prices while entertaining Western and Asian alternative proposals. And now Berdimukhammedov has raised the stakes by becoming the first leader of Turkmenistan to formally attend a NATO summit. The president is feeling out his options for security outside of Moscow — a break with the behavior typical of Turkmenistan during the past century.

Moscow will certainly take notice and make some sort of move, since the upcoming NATO summit is a pivotal benchmark for Russia’s geopolitical position as an international leader. NATO will be considering extending membership offers to several countries that are crucially important to Russia, including the former Soviet states of Georgia and Ukraine. The last thing Moscow needs is for Turkmenistan also to be cozying up to the rival alliance — and Ashgabat knows it

SummaryAlthough a clash between Georgia and Russia over the secessionist region of Abkhazia seemed very possible last week as both players positioned troops, a trigger is still necessary before this long-standing feud erupts.

AnalysisAn escalation between Georgia and Russia made it look as if the two countries’ simmering conflict over Abkhazia had reached a breaking point. But the escalation fizzled shortly thereafter given that Tbilisi knows it remains solo in its attempts to fight its larger neighbor — especially after a meeting between Georgian officials and a European envoy May 12.

Related LinkIntelligence Guidance: Week of May 11, 2008 While the clash between Russia and Georgia has subsided somewhat into its typical stagnation, that does not mean the chatter will stop entirely. Stratfor assumed that a large escalation was occurring that could turn this crisis into a war because both players have moved large numbers of troops into positions on the border of Georgia’s secessionist region of Abkhazia.

For Russia, the troop movement was an easy maneuver. In fact, Russia’s military is nearly 75 percent bigger than the entire population of Georgia. But for Georgia, positioning troops to total a force of 7,500 along Abkhazia’s border was a big deal — or so Stratfor assumed since it knows that Tbilisi understands that a military confrontation with Russia would be suicidal. This is what has kept Tbilisi from acting in the past.

This awareness is what prompted the Georgian government to court Western players for support, especially among the United States, NATO and the European Union. But the United States and NATO have turned a cold shoulder to Georgia. They have no appetite for a Russian confrontation when they have Iraq and Afghanistan still on their plates. While initially the European Union seemed to pay attention, European heavyweights such as Germany and France have continually cautioned against tangling with Russia. They know how easily Moscow can turn off the switch supplying energy to Europe, which is dependent on Russia for 40 percent of its energy intake.

However, this reservation has not stopped European countries from at least reaching out to Georgia on the diplomatic front. On May 12, an envoy from Europe consisting of the foreign ministers from EU president Slovenia and anti-Russian hardliners like Poland, Sweden and Lithuania met in Tbilisi with Georgian President Mikhail Saakashvili. The delegation, though including the Slovene foreign minister, was not EU-sanctioned since most EU members would not support a move on Georgia’s behalf. In fact, Stratfor sources in Georgia report that none of the countries will be sending military or technical support to Georgia, though each plans to extend diplomatic support – a weak substitute for what Tbilisi hoped to garner.

One form of support these European countries can offer Georgia is their ability to veto a resumption of Russian-EU talks. Poland, Lithuania and Sweden all have their own reasons to veto the talks. Russian missile threats against Poland, a prolonged break in oil supplies from Russia to Lithuania and a timber supply crisis from Russia to Sweden are all reasons why European countries might veto the talks.

The European Union says it has been talking with Lithuania to resume the Russian-EU partnership despite the oil crisis. However, with Lithuania saying it will continue its veto policy until both the oil and Georgia situations are resolved, those EU-Lithuanian negotiations do not look promising. Moreover, countries such a Poland or Sweden could also take up the helm of vetoing EU-Russian relations.

Regardless, at least for now, the drama between Georgia and Russia seems at a standstill. Both actors know that outsiders are not going to push the situation. Tbilisi knows it cannot proceed alone and Moscow does not seem eager to invade. Even with troops in place, Stratfor is still waiting for a trigger that could finally break this long-standing feud.

Geopolitical Diary: Russia Takes A Double HitJuly 9, 2008Tuesday was not the best of days for the Russians. Not only did the Serbian parliament usher in a new government — the most stable and pro-Western alignment the country has had since World War I — but also the United States and the Czech Republic signed a deal to install an X-band radar on Czech soil as part of an American ballistic missile defense (BMD) system.

Serbia, as a Slavic state surrounded by foes, has been a bastion of Russian influence for years. All of Serbia’s neighbors are now EU members, applicants or protectorates. And the change in Belgrade makes it likely that Serbia will firmly fall into the West and Russia will lose its last willing ally in Europe.

Serbia is surrounded by Europe, so the only means Moscow can use to seriously draw the country back into the Russian fold is to use lots of cold hard cash. The Russians may not even be too concerned about Serbia’s new government. In fact, the political shift could translate into good business for Russian investors if, through a western-oriented Serbia, they have access to the European Union. But business is hardly a substitute for the geopolitical influence that Russia previously enjoyed.

The BMD issue is a double hit. While the immediate reason for the project is to deter against a potential Iranian nuclear missile, it also sets up a scenario in which a BMD could be expanded, deepened and reconfigured to hold off a Russian deterrent 20 years from now. The Czech Republic is also now included in a lineup of European countries that stretches from Iceland to Turkey that host American military facilities. Poland will also join that lineup once its domestic politics facilitates the signing of a deal to house a U.S. BMD installation.

While the Russians have (loudly) promised reprisals for the U.S. expansion into Central Europe — specifically Poland and Czech Republic — they have little influence over this development. There is nothing that Russia can do to deter the distrust of Central Europeans. Steps such as, for example, returning offensive ballistic missiles to Kaliningrad or retargeting portions of its nuclear arsenal at BMD sites, would only solidify the Europeans’ willingness to collaborate with the Americans on security issues.

While Russia does not really have any options that constitute an obvious retaliatory step, what it will do can be broken into two categories.

First, Russia is making the Europeans — and especially Central Europeans — pay a price for their geopolitical alignment. Since 2000, Russia has steadily jacked up the price of natural gas sold to Europe fourfold, with another 25 percent hike slated for the next 12 months. In addition, alternate energy shipment routes starting to come online (specifically for oil) have been expressly intended to bypass Central European transit states. In the case of Poland this will leave several Cold War-era refineries without a source of crude.

Second, Russia is hardening its outer shell. Russia has no clear geographic barriers separating it from most of its neighbors. This is one of the reasons why Russians tend to be so distrustful of outsiders. From Napoleon to Wilhelm II to Hitler, outsiders tend to invade Russia. Therefore, the Kremlin is using its energy income, energy supply routes, weapons sales and intelligence services to subtly (and not so subtly) reshape the Russian near abroad rather than merely rage against things it cannot change in Belgrade, Prague and Warsaw.

Ultimately, Russia’s vital interest lies is in its borderlands. In recent months the Russians have adjusted the expectations of Ukraine, Belarus, Kazakhstan, Turkmenistan Azerbaijan and Georgia, forcing them to see the world from a slightly more Russian point of view. This strategy is hardly foolproof. For every two steps it takes forward, Russia takes another step back. But what Russia really needs to feel secure are buffers. From the Russian point of view, it is better to tussle in the borderlands than on the home front. And while the U.S./Czech deal announced Tuesday and the move by Serbia to adopt a more pro-Western government do not advance Russia’s influence, the geopolitical giant is not without options.

Geopolitical Diary: The Multiple Messages Of Military Movement In GeorgiaJuly 16, 2008The United States has begun joint military maneuvers with Georgia. About 1,000 U.S. troops have been deployed to Georgia to train with Georgian troops. They will be based near Tbilisi, the capital. There will also be small contingents from other regional countries participating. Russia has also launched military exercises involving 8,000 troops in the North Caucasus region bordering on Georgia. The Americans have said that these maneuvers were scheduled months ago and the Russians said that their own exercises have nothing to do with what is going on in Georgia. The Georgians also announced Tuesday that they have approved a 5,000-troop increase in their military as well as a 27 percent increase in their defense budget.

It is certainly true that the American exercises were planned a while ago. But that does not change the fact that the decision to conduct the exercises was going to be seen by the Russians as a challenge, and that the Americans knew that and intended it as such. The Russians have been busy trying to re-assert their sphere of influence in the region, and have seen Georgia as particularly troublesome, in part because it is seeking membership in NATO and in part because the Russians have viewed them in the past as supporting anti-Russian groups in the region. Moreover, the Russians have viewed the United States as deliberately encouraging Georgian aspirations for NATO, and therefore deliberately challenging Russian interests. Whatever their claims, the Americans knew that the Russians would be upset at the maneuvers and that is clearly why the Americans did what they did.

The United States has a credibility problem in the former Soviet Union — Washington is not seen as being particularly effective in protecting its interests or the interests of its allies in the region. The Russians appear to be on the ascendancy and the Americans seem content to let them ascend. This is affecting the behavior of nations around Russia, who seeing U.S. inattentiveness or weakness, find themselves with few options in the face of Russian assertiveness.

The reason, of course, is that the United States is indeed, for the moment, weak. It is absorbed in Iraq and Afghanistan, and has no meaningful reserves. It cannot promise military support to allies like Georgia, because it in fact has very few assets with which to support them. The decision to hold this maneuver with 1,000 troops is a symbolic gesture of commitment to an ally. But the Russians deliberately deployed a much larger number to make several points. They wanted to show the Georgians that they have many more troops available than the Americans, are much nearer, and are more able to mobilize that force quickly while the Americans took months to schedule their undertaking.

The Russian lesson to the Georgians is clear. The Americans can make a symbolic gesture, but symbols are not very important. What matters is, as the Russians say, the correlation of forces. The United States might well be a global power, but at this place and at this time, the Russians are much stronger — and they don’t have to travel very far to get there.

During a period of time when the Russians are in Abkhazia and South Ossetia, breakaway regions of Georgia, they are trying to demonstrate that the American maneuvers should be read as a sign of weakness, rather than demonstration of commitment. The troops the United States committed to this exercise were far too few and came from too far away to make much of a difference.

That is why the Georgian decision to increase its own defense budget and army is more significant than the exercise. But even that isn’t significant. No matter how much the Georgians do, they cannot counter-balance the Russians. Russia is not looking to invade Georgia, but it is trying to show that invasion is its decision to make, and not one that will be influenced by U.S. troops or Georgian budgets. The lesson is intended to be read not only by the Georgians, but other countries in the former Soviet Union.

Russia is saying that the United States is going to have to do a lot better than this if it is to be considered a credible player in the region and that the Americans can’t do much better than what they have already done. Ultimately, the Russians are working to reshape perceptions of American power in the former Soviet Union in order to dispel what they claim is the illusion that Americans are a shield to nations acting in opposition to Russian interests.

Former Cuban leader Fidel Castro has said there is no need for explanations or apologies over reports that Russia might send nuclear bombers to Cuba, Bloomberg reported July 24, citing a statement from Castro posted to the Internet on July 23. Cuba has the “nerves of steel” needed in current “times of genocide,” and the United States knows it, the statement says.

Geopolitical Diary: Cuba and a Return to the Russian-U.S. Tug-of-WarJuly 25, 2008For the past week, a series of stories and denials have been published in the Russian media surrounding a possible plan for Russia to relocate a refueling base in Cuba and resume flights of Russia’s Tu-160 “Blackjack” and Tu-95 “Bear” nuclear-capable strategic bombers back into the Western Hemisphere. All the noise reached a crescendo when another piece of information — true or not — was leaked to the Russian press that a crew of the Russian bombers had gone to Cuba on Thursday to conduct preliminary surveys.

Thus far, there is no confirmation that Russia is indeed returning militarily to Cuba. It is, however, a signal of what could happen if the United Stated does not heed Russian demands for Washington to back off from Moscow’s turf. This would be, in Moscow’s eyes, an equal response to the United States’ signing ballistic missile defense system treaties with the Czech Republic and Poland — right on Russia’s doorstep — as well as discussing NATO membership with the former Soviet states of Ukraine and Georgia.

Russia did, in fact, respond to the West’s encroachment: cutting energy supplies to Europe and sending more military into Georgia’s secessionist regions. But the problem was that Moscow simply hadn’t gotten Washington’s attention.

Washington has been too wrapped up in other issues — such as the upcoming presidential election, wars in Afghanistan and Iraq, negotiations with Iran and simply not believing Russia had any real tools with which to threaten it –- that it airily dismissed all of Moscow’s provocations. This has made Russia’s reprisals Europe’s problem at a time when Moscow wants to prove it once again is a global power and can stand up against its traditional foe: the United States. So Russia sent a signal of something that the United States simply cannot ignore — the moving of the Russian-U.S. tug-of-war from Russia’s doorstep to the U.S. doorstep. This is a serious threat and one with which Washington is quite familiar.

The Cuba option would be a powerful move against the United States — just as it was during the 1950s and 1960s — because it directly penetrates the United States’ immediate periphery. Combine the Cuba rumors with Venezuelan President Hugo Chavez’s trip to Moscow this past week — which held its own flurry of rumored deals over Russian bases and defense deals — and Moscow is reminding the Americans of a prior miscalculation. In the 1950s, Washington assumed that it could threaten the Soviet Union along its borders in Europe, South Asia and East Asia. And the United States believed it could not be threatened in its homeland, in the Western Hemisphere — America assumed no foreign power would dare violate the Monroe Doctrine. Washington bet that Moscow did not have an equivalent threat, and it was wrong.

The Soviet Union’s move into Cuba back then changed the entire dynamic of the Cold War. The Soviet presence threatened the sea lanes out of the Gulf of Mexico, major facilities in Florida, all of the Caribbean airspace and some of the Eastern Seaboard. It forced the U.S. Navy and Air Force to shift resources and account for Soviet units there. It diverted the CIA into Latin America, forcing the conflicts in Central American and Grenada. Despite its inherent military vulnerability, Cuba was one of the most strategic Soviet assets. Nothing was the same after Cuba.

The Russians are reminding the Americans of their prior miscalculations on how Russians respond to perceived threats. The United States has shifted its focus from its periphery and once again moved to responding to threats that could never truly physically hit the homeland — such as an Iranian missile threat. In the nearly 20 years since the collapse of the Soviet Union, the United States has returned to and enjoyed a world where any potential military threat is an ocean and half a world away.

For now, this is just a signal and no real movement on the ground has been made. Russia is serious, however, about its ability to follow through if the United States does not release the pressure elsewhere. The moves over Cuba are not an indicator of the Russians’ global intentions, but are meant to signal an increase in Moscow’s assertiveness. It is a gutsy and interesting move by the Russians. We have yet to see whether the Americans have really noticed (or want to admit that they noticed) and can divert attention from the Middle East and domestic politics to address the Russian threat — either by backing down or by escalating the situation, which would bring back a Cold War standoff.

Of course, if Washington and Moscow do get serious about things such as Cuba, then the U.S. escalation would go far beyond what Russia currently feels threatened over.

ALEXEY PANOV/AFP/Getty ImagesThe Russian aircraft carrier Admiral KuznetsovSummaryRussia plans to upgrade its Borei-class nuclear-powered ballistic missile submarines and eventually build a small fleet of new aircraft carriers, the chief of the Russian navy said July 27. Russia has slowly been turning its military fortunes around from the decay and decline of the 1990s, and it could be close to having the foundation for reaching some of its goals.

AnalysisEditor’s Note: This is the second in a two-part series on the Russian navy.

During the celebration of Russia’s Navy Day on July 27, the country’s senior naval officer, Adm. Vladimir Vysotsky, articulated two points and echoed a third made July 25 about the future of the Russian fleet. Though his claims remain just that, they warrant further analysis, given that they will go to the heart of Russia’s global military reach.

Back on July 25, Vysotsky insisted that new nuclear-powered ballistic missile submarines (SSBNs) and attack submarines (SSNs) are top priorities for the Russian navy. Two days later, he further explained that the new Borei (Project 955) SSBN design will be upgraded starting with the fourth hull of the class — the next to be laid down — while preliminary research is under way on a new architecture for future aircraft carrier groups, including coordination and contact with a “space group.” Vysotsky hopes to one day have five or six such carrier groups, though design work has not yet begun.

The SSBNThe lead boat of the Borei class, the Yuri Dolgoruky, was only just launched last year, more than a decade after its keel was laid. It underwent a dramatic redesign when the initial submarine-launched ballistic missile (SLBM) with which it was to be outfitted failed repeatedly in testing and was scrapped. Though the Yuri Dolgoruky is now being fitted out and two sister ships are already under construction, the replacement Bulava SLBM (known to NATO as the SS-NX-30) also has yet to mature. The Bulava fared poorly in testing, with three consecutive failures toward the end of 2006 and another in 2007. (There are rumors that testing will resume soon.)

Related Special Topic PageRussia’s Military Related LinksRussia: The Future of the Fleet Russia: Future Naval Prospects Russia: Sustaining the Strategic Fleet Russia: Missiles That Work An SSBN and SLBM represent a complex synthesis of some of the most advanced technologies available to mankind. One must be carefully designed and tailored to work with the other. To develop, design, alter and produce both at once is a very risky proposition. Further complicating the matter, a rush forward with production has left Moscow working with not just one, but three hulls at various stages of completion even before the missile — also supposedly entering production — is flying properly, and before integration has been completed on a single boat.

Vysotsky’s point about “upgrading” the fourth hull simply means that the Russians hope to have the kinks hammered out and the SLBM fully integrated by the time the fourth hull really starts to take shape. In other words, the hope is that the fourth hull will be the first true “production” hull — the first with the design more or less fixed from the start.

While this is obviously less than optimal, Russia is working with what it has in hand, and it would be wrong to assume that the Russians’ troubles with the Bulava are insurmountable.

Ultimately, Russia is committed to the sea leg of its nuclear triad and is working deliberately — if slowly — to build the submarines that will carry its deterrent toward the middle of this century.

The SSNMeanwhile, the last Akula II attack boat, laid down in the mid-1980s, is currently in trials (though there are rumors that this boat might be leased to India). The Akula IIs are by most accounts exceptional attack submarines, with levels of quieting comparable to or better than the U.S. improved Los Angeles class.

The launch of the Severodvinsk (of the Yasen or Project 885 class), the first new SSN to be designed and built since the collapse of the Soviet Union, is expected in 2009. Some sources suggest that a second of the class is already under construction, and that more could follow.

Though the Yasen class incorporates some modern design features with which Russian engineers have little experience, there is little doubt that the architecture relies substantially on the success of the Akula series, and comparable or better quality can be expected.

The SSN fleet is important for Moscow because of its geography. Split not only between two oceans, but also among many bodies of water, Russia’s fleet is based far from the world’s major sea lines of communication and often on the wrong side of chokepoints and technologically superior naval forces. The Soviets favored SSNs to hold those lines at risk, because their stealth and range allowed them to operate far from home port.

The CarrierRussia’s talk of aircraft carriers is at once the most treacherous and the most ambitious. Stratfor has remarked before that the pursuit of a massive carrier fleet can be a path of folly, given not only the investment, but also the institutional skill needed to conduct deployments and flight deck operations — to say nothing of doing it well. The commitment of resources and effort, in other words, can often be used more effectively elsewhere.

Moreover, the Soviet Union has long struggled with carriers. Though it repeatedly had ambitions of a carrier fleet comparable to or second only to the United States’, the Kremlin only commissioned a full-deck carrier capable of launching conventional fixed wing aircraft in 1990: the Admiral Kuznetsov.

At nearly 60,000 tons and capable of embarking a large squadron of some 18 navalized Su-33 Flanker fighters, the Kuznetsov is larger than any other aircraft carrier in the world except those of the U.S. Navy. While five or six carriers over anything but the very long term might be ambitious to a fault for Russia, Russian shipyards are capable of building a ship of that size.

While Russia lacks much institutional knowledge about flight deck operations, the capability to regularly park very capable Flankers in the Mediterranean and beyond would be a significant shift in the global maritime balance, even if the ship and its escorts would likely fare poorly in an actual shooting war with U.S. and NATO naval formations.

While Vysotsky’s hint was only vague (and it largely looks like research is still ongoing), Russia’s new concept for carrier groups might include much higher integration with space-based sensors and platforms than ever before — an important objective if Russia hopes to even attempt to operate effectively far from its own shores in the 21st century.

In ContextUltimately, Russia is beginning to rebuild from the ashes of the Soviet Union (in many cases with the benefit of the height of Soviet technology). But rebuilding a navy is about more than just hardware, and complex tasks like sustained flight deck operations and anti-submarine warfare are some of the most advanced techniques a navy can learn — in other words, they are often the last things a navy learns and the first it forgets.

Though some drills and occasional deployments are taking place, the Russian navy has a long way to go before truly regaining its proficiency from Soviet days. Nevertheless, it is wrong to judge the Russian military by the established standards of modern military thought. The Soviet solution to a problem was always a bit more quantitative and brute-force than a U.S. or NATO solution.

None of this is to deny or understate the challenges that Moscow faces. Rather, Stratfor is highlighting that the Russian navy is currently slated to have several new SSBNs and several more new SSN hulls in the water in three to five years, and could actually be investing significantly in constituting a small carrier fleet by then. While this might not win Moscow any wars with the world’s first-rate naval powers, it could begin to afford the Kremlin global military capabilities that it has long suffered without.

August 8, 2008Fighting in Georgia’s separatist enclave of South Ossetia picked up overnight Friday. Georgia moved regular army forces into the South Ossetian capital of Tskhinvali proper after having captured most of the suburbs and encircling the town. The Georgian government says that its forces now hold most South Ossetian territory, including all of the heights overlooking the capital.

South Ossetia seceded from Georgia in 1993 during the chaos of the Soviet breakup. In those early post-Soviet days, a crumbling Russia wanted to maintain footholds south of the Caucasus Mountains and ensure that Georgia could not become a launching point for foreign influence into Russian territory. On the other side of the border, Georgia was undergoing a nationalist spasm that made the South Ossetians believe that their destruction was imminent. These fears merged and the Russians provided the South Ossetians with the military capabilities they needed to secure and hold independence. Fifteen years later, the Georgians are attempting to eliminate the South Ossetian separatists.

But this conflict is about much more than simply which flag flies over a tiny chunk of territory in the Caucasus. Georgia is an extremely pro-American and pro-Western state and represents the easternmost foothold of American/Western power. It has also been in the Russian orbit for the bulk of the past 300 years. As such, it is the hottest flashpoint in Western-Russian relations. Which way the territory falls ultimately decides whether Russia can determine security concerns that literally fall right on the border of its heartland. To put it another way, what is being decided here is whether bordering Russia and simultaneously being a U.S. ally is a suicidal combination. Whichever way this works out, the dynamics of the entire region are about to be turned on their head.

The conflict started on Thursday because the South Ossetians feared that the Russians were about to sell them out. Russia does not want Georgia to join NATO — or even to be appearing to be seeking to join NATO — and so has cranked up political, economic and military pressure on Tbilisi. The two had been negotiating a deal by which Georgia would abandon its NATO bid and tone down its rhetoric in exchange for being allowed to continue existing. Since South Ossetia (and, to a lesser degree, Georgia’s other breakaway region of Abkhazia) gauges its own prospects for continued existence based on the level of tension between Moscow and Tbilisi, the South Ossetians feared that restoration of some sort of “normal” relations between Russia and Georgia could destroy them. Ergo they began shelling Georgian towns near Tskhinvali. The Georgians responded with an invasion.

Fundamentally there are only two locations in this conflict that matter: the capital and the southern end of the Roki Tunnel, which connects South Ossetia to Russia. The capital is the only city of note in South Ossetia, and the Roki is the only means for Russia to shuttle forces to and from the territory. The tunnel is only two lanes wide and is an excellent choke point. If Georgia can capture and hold those two targets, South Ossetia’s 15-year rebellion will in essence be over.

But that can happen only if the Russians let it. While Georgia’s forces — with U.S. training — have become demonstrably more capable in the past five years, Georgia remains a relative military pigmy and South Ossetia is a Russian client.

Effective Russian intervention has not yet materialized, however. Russian sources are reporting that the Georgians have engaged Russian peacekeepers (forces the Russians have long deployed to guarantee South Ossetia’s independence) and killed their commander. Georgian sources report that Russian jets have bombed Gori, a city in Georgia proper that is being used for the invasion’s launching point. Those reports also claim that Georgian forces downed one of the jets.

The truth of the reports from either side cannot be confirmed at this point, but this we know for sure: If the Russians were committed to assisting the South Ossetians, then the Roki tunnel would be flooded with military assets flowing south instead of evacuees flooding north. All reports at present indicate that the northern end of the tunnel is cluttered with evacuation buses, by some reports enough to transport a sizable portion of South Ossetia’s total population of about 70,000.

If the Russians do commit militarily, one of the most enthusiastic forces they could tap to assist South Ossetia are the Abkhaz. Like South Ossetia, Abkhazia is another Georgian separatist enclave that could have attained and maintained its de facto independence only with active Russian military support. The Abkhaz say they are willing to send at least 1,000 volunteers to back up South Ossetia, but it appears the Russians are restraining them.

The Russians appear to be making up their minds about what to do. President Dmitri Medvedev is chairing a National Security Council meeting as this diary is being published, a meeting that Prime Minister Vladimir Putin — at the Olympics in Beijing — is undoubtedly attending remotely.

The Russians now face an uncomfortable decision. South Ossetia wants to force Russia to intervene militarily, but Russia prefers to maintain the fiction that it is not Russian military assets that guarantee South Ossetian independence. Should Russia not intervene, however, it will essentially have demonstrated its ineffectiveness in its own back yard. Kosovo’s independence proved that Russian diplomatic power in Europe was nonexistent. Getting forced out of South Ossetia — a territory that Russia not only borders but has troops in — would be several steps past humiliation.

And so we would be very surprised if Russia does not act. Which means we are very surprised that the Russians have not yet acted firmly. They will need to do so very soon, for if Georgia manages to capture both Tskhinvali and the mouth of the Roki Tunnel, then Russia not only will have lost its foothold in the South Caucasus, but also will be unable to use purely conventional forces to put the military balance back where Moscow would like it to be.

So, for now, all eyes are on that security council meeting in Moscow. The Russians need to decide if they are all in.

Given the speed with which the Russians reacted to Georgia’s incursion into South Ossetia, Moscow was clearly ready to intervene. We suspect the Georgians were set up for this in some way, but at this point the buildup to the conflict no longer matters. What matters is the message that Russia is sending to the West.

Russian President Dmitri Medvedev summed this message up best: “Historically Russia has been, and will continue to be, a guarantor of security for peoples of the Caucasus.”

Strategically, we said Russia would respond to Kosovo’s independence, and they have. Russia is now declaring the Caucasus to be part of its sphere of influence. We have spoken for months of how Russia would find a window of opportunity to redefine the region. This is happening now. All too familiar with the sight of Russian tanks, the Baltic countries are terrified of what they face in the long run, and they should be. This is the first major Russian intervention since the fall of the Soviet Union. Yes, Russia has been involved elsewhere. Yes, Russia has fought. But this is on a new order of confidence and indifference to general opinion. We will look at this as a defining moment.

The most important reaction will not be in the United States or Western Europe. It is the reaction in the former Soviet states that matters most right now. That is the real audience for this. Watch the reaction of Ukraine, Kazakhstan, Nagorno-Karabakh and the Balts. How will Russia’s moves affect them psychologically?

The Russians hold a trump card with the Americans: Iran. They can flood Iran with weapons at will. The main U.S. counter is in Ukraine and Central Asia, but is not nearly as painful.

Tactically, there is only one issue: Will the Russians attack Georgia on the ground? If they are going to, the Russians have likely made that decision days ago.

Focus on whether Russia invades Georgia proper. Then watch the former Soviet states. The United States and Germany are of secondary interest at this point.

On the second day of its conflict with Georgia forces, Russia's military strategy is becoming increasingly clear. With an overwhelming advantage in firepower--and near-complete control of the air--Moscow is going for the knockout punch, attempting to drive Georgia forces from the breakaway region of South Ossetia, and (perhaps) other areas as well.

As the Wall Street Journal notes in today's lead editorial, the latest conflict in the Caucasus is a study in miscalculations. Georgian President Mikheil Saakashvili, a close U.S. ally, has long pledged to retake South Ossetia and another separatist region, Abkhazia. The recent fighting apparently began when Mr. Saakashvilli sent his forces into Ossetia, attempting to reassert his control, once and for all.

But the Georgian leader apparently miscalculated. Within hours, Russian armored columns, backed by helicopters and aircraft, were rolling into the disputed areas, supporting "peacekeeping" forces that were already there. By some accounts, Moscow's forces have already reversed early territorial gains by Georgian forces; they have also conducted numerous bombing runs against airfields, port facilities and other strategic targets outside Ossetia and Abhazia, killing thousands of civilians.

By late Saturday, Georgian officials were requesting a cease fire--and help from the West. Readers will recall that Tbilisi has actively pursued NATO membership, and created one of the true, democratic regimes in the former Soviet bloc. Until a few days ago, more than 1,000 U.S. military advisers were in Georgia, providing training for the nation's armed forces. The two militaries have also worked closely in Iraq, where Georgia provides the third largest contingent of foreign security forces.

With those ties, Tiblisi is hoping that the U.S. and NATO offer more than "strong denunciations" of Russian military moves, and support for Georgia's territorial integrity. However, Washington and its European partners have no stomach for a possible conflict with Moscow--in Russia's vertiable backyard--so western efforts will be limited to diplomacy.

The Russians understand this, and that's one reason they're escalating military activity. Various media outlets report that Moscow's Black Sea Fleet is steaming south, preparing for amphibious operations along the Georgian coast. That would open a second front for the Tbilisi's out manned military, placing a further strain on defenders.

At this point, it's unclear what message the U.S. and NATO are sending to the Russians. As the WSJ observed earlier today, Russian Prime Minister Putin, who has discussed the crisis with President Bush in Beijing, needs to hear that imperialism in the Caucasus will have consequences for Moscow's relations with the west.

But no one seems ready to deliver that type of blunt warning to the Russia. Mr. Putin got a friendly hug from Mr. Bush before their meeting, and a few months ago, Germany vetoed plans to put Georgia and Ukraine on track for eventual NATO membership. That fact wasn't lost on Vladimir Putin, either.

Whatever his miscalculations, Mr. Saakashvilli represents the type of pro-western reformer that the U.S. has long sought in the eastern bloc. That's why the strike against Georgia (ultimately) represents an attack on democracy. If Russia presses its attack past the disputed regions--and continues its indiscriminate bombing of civilian areas--Washington and its allies will face a difficult choice.

No one wants a ground war in the Caucasus, but at what point will they draw a line against the Russians? And will they take a stand before (or after) the first T-90s roll toward Tbilisi?

At the time I didn't understand why we supported the breakaway of Kosovo. As Stratfor predicted, the Russians looked for a place to retaliate rhetorically hoisting us on our petard with its justifications. What will they do now viz our efforts to stop Iran from going nuke?

Condi Rice is supposed to be a deep expert in Russian matters, but as best as I can tell the Bush administration has misread Putin and seriously overplayed our hand viz the Russkis.

Kremlin CapersAugust 11, 2008Grim news continued to flow from Georgia yesterday. The Georgians said Russia had bombed the civilian airport in Tbilisi, while Russian warships off the coast began an economic embargo. Prime Minister Vladimir Putin left the Beijing Olympics and flew to Russian North Ossetia, where he revealingly criticized "Georgia's aspiration to join NATO."

Not least among the geopolitical realities coming to the surface at the moment is that of just who's top dog in the Kremlin. While it's widely thought Mr. Putin's power trumps that of Russian President Dmitry Medvedev, an interesting wrinkle has emerged elsewhere in the new Russia that has modern-day Kremlinologists wondering whether the president might yet become more his own man.

The story revolves around Russian coal and steel company Mechel, which is publicly listed on the New York Stock exchange. On Friday the firm said it was going to postpone a preferred share placement in the wake of a battering its shares took from the volatile Mr. Putin.

Late last month, Mr. Putin accused the company of price gouging and tax evasion and warned of investigations to follow. He also got personal after Mechel CEO Igor Zyuzin failed to show up to a meeting the prime minister was holding with business leaders. "The director has been invited, and he suddenly became ill," said Mr. Putin, according to the Moscow Times. "I think he should get well as soon as possible. Otherwise, we will have to send him a doctor and clean up all the problems." Mr. Zyuzin had been hospitalized a day earlier with heart problems.

Coming from Mr. Putin, such talk is nothing short of terrifying: Consider the fate of former Yukos CEO Mikhail Khodorkovsky, now in jail in Siberia while Yukos's assets were gobbled up by state-owned oil company Rosneft. Investors swiftly took note: Mechel's stock dropped by more than 33% in a day, while the Russian exchange fell by 9%.

The Mechel play springs from a familiar game plan, in which accusations of tax or regulatory problems become the alibis by which the Kremlin and its cronies seize the assets of unwanted competitors. "It is a strictly commercial operation in the framework of Kremlin Inc. Tribute is no longer enough for them; they want to take everything into ownership," speculates Russian analyst Vladimir Pribylovsky. A similar scenario has played out with British Petroleum's BP-TNK venture in Russia, in which the Russian partners used visa "issues" to force CEO Robert Dudley out of the country.

The surprise in all this is that President Medvedev has decided to protest. "We need to create a normal investment climate in our country," the President said, without mentioning Mr. Putin. "Our law-enforcement agencies and government authorities should stop causing nightmares for business." A Medvedev adviser added that "it is not correct to destroy your own stock market . . . and wipe off $60 billion." The Russian stock market is trading at a 22-month low.

The question for Kremlinologists is whether Mr. Medvedev's comments are evidence of some independence on his part and perhaps a looming power struggle, or merely amount to a good cop, bad cop routine. It would be heartening to think it's the former, and that Russia's leaders are beginning to realize there are costs to their habits of confiscation. But with foreign investors still looking to make a fast killing in Russian markets (foreign direct investment jumped by some 60% between 2006 and 2007), those costs apparently won't be paid for some time. Meanwhile, for anyone thinking of putting money into Russia, the message should be caveat investor.

See all of today's editorials and op-eds, plus video commentary, on Opinion Journal.

How the West Can Stand Up to RussiaBy GARY SCHMITT and MAURO DE LORENZOAugust 12, 2008; Page A21

Given the cutthroat politics Moscow has practiced at home and abroad in recent years -- with only the softest protests from the U.S. and its allies -- no one should be surprised by Russia's decision to conquer the two breakaway regions of Georgia. Nevertheless, it should once and for all disabuse policy makers in Washington and Brussels of hopes that Russia intends to become part of the post-Cold War condominium of democratic peace in Europe. The point of the Kremlin's invasion of Georgia, which now threatens the capital city of Tbilisi, is to demonstrate to the world how impotent that security order has become.

For Moscow, Georgian President Mikheil Saakashvili's mistake in finally taking the bait of Russian provocations and ordering his troops in South Ossetia last week was the opening they sought -- and for which they had been planning for some time.

David Gothard South Ossetia is not, as some have suggested, tit-for-tat payback for American and European recognition, over Russian objections, of Kosovo's independence from Serbia. Russia has been "at war" with democratic Georgia for some time. Driven to distraction by Mr. Saakashvili's assertiveness and Georgia's desire to join NATO, Russian Prime Minister Vladimir Putin first tried to bring the country to its knees through economic warfare beginning in 2005. He cut off access to Russian markets, expelled Georgians from Russia, quadrupled the price of Russian energy to Georgia, and severed transport links.

Georgia failed to collapse. To the contrary, it has flourished: After the Rose Revolution of 2003 ended the corrupt reign of Eduard Shevardnadze, the former Soviet foreign minister, Georgia instituted far-reaching reforms to its governing structures, cleaned up the endemic corruption that infected every facet of pre-Rose Revolution life, and found new markets for its products in Turkey and Europe. It persevered with some of the most profound and thorough economic and pro-business reforms ever undertaken by a developing country -- slashing taxes and government regulations, and privatizing state-owned enterprises. All of which is reflected in Georgia's meteoric rise on the World Bank's Doing Business indicators. The irrelevance of Russian economic sanctions to Georgia made the ideological challenge that the Rose Revolution posed to Putin's vision of Russia even more profound.

Unable to bend Tbilisi to its will, the Kremlin in recent months ratcheted up the pressure and provocations in South Ossetia and Abkhazia -- reinforcing Russian forces and Russian-backed paramilitaries, violating Georgian air space with Russian jets, shelling Georgian villages and outposts, and passing a resolution to treat the two provinces administratively as part of Russia. Starting in 2004, Russia began issuing passports to the residents of South Ossetia and Abkhazia, a fact that today serves as one of the main pretexts for the ferocity of Moscow's military campaign.

However, Georgia's "impertinence" in seeking NATO membership and building close ties with Europe does not fully explain Moscow's blatant display of brute power. In a speech before the Munich Conference on Security Policy in February last year, Mr. Putin made it clear that Russia would no longer accept the rules of the international road as set by the democratic West. It was an in-your-face challenge to the U.S. and Europe, and we blinked. With the exception of John McCain, who warned against "needless confrontation" on the part of Moscow, no American or European official at the conference made any attempt to push back. Ever since, Moscow's contempt for NATO, the European Union and Washington has only grown.

Reversing this course will not be easy, but it is absolutely necessary. At stake are international law, energy security, NATO's future, and American credibility when it comes to supporting new democracies. It is also about resisting Russia's openly hegemonic designs on its neighbors -- including Ukraine, which Mr. Putin reportedly described as "not a real nation" to President Bush at their meeting in Sochi earlier this year.

What can the West do? The first step is for the U.S. and its allies to rush military and medical supplies to Tbilisi. If we want democracy to survive there, Georgians have to believe that we have their backs. At the moment, the tepidness of the Western response has given them serious cause for doubt. In addition, Washington should lead the effort to devise a list of economic and diplomatic sanctions toward Russia that impose real costs for what Moscow has done. Russia should know that the West has a greater capacity to sustain a new Cold War than Russia, with its petroleum-dependent economy, does.

Next, the West should make use of Russia's claim that its role in South Ossetia and Abkhazia is driven by the need to protect the populations there. If so, Moscow should have no objections to U.N.-sanctioned peacekeepers and observers moving into those two regions to replace the jerry-rigged system of "peacekeepers" that, until the war broke out, consisted of Russian troops, local separatist militaries and Georgian forces. If nothing else, the goal should be to put Mr. Putin and Dmitry Medvedev, the new Russian president, on their back foot diplomatically.

Over the longer term, it is essential that Russia's stranglehold on Europe's energy supplies be broken. The EU's failure to get its house in order by diversifying energy supplies and insisting that Russia, in turn, open up its own market, has created a situation in which Moscow rightly believes it has significant leverage over the policy positions of key countries such as Germany.

It was Germany that led the opposition at the most recent NATO summit in April against a Membership Action Plan for Georgia, emphasizing that a country that has unresolved conflicts should not be allowed to enter NATO. We presumably won't know for some time what the precise calculations were inside the Kremlin when it came to the decision to send troops into Georgia, but one can surely assume that the German position did nothing to discourage Russia's plans.

The real payback for Moscow's decision to invade Georgia should be the sweet revenge of a strong, prosperous and fully independent Georgia. Building on the strides Georgia has already made, Brussels and Washington should give Tbilisi a clear road to NATO and EU membership.

Mr. Schmitt is director of the American Enterprise Institute's program on advanced strategic studies. Mr. De Lorenzo is an AEI resident fellow.

ALEXEY NIKOLSKY/AFP/Getty ImagesRussian Prime Minister Vladimir PutinSummaryIn the months before the Russo-Georgian war, Tbilisi complained that Russians were increasing their intelligence operations inside Georgia and its two secessionist regions. Russia’s Federal Security Service (FSB, formerly the KGB) did indeed have heavy influence on Russia’s military operations in Georgia; the FSB reportedly laid extensive groundwork in the country and had a significant role in the campaign’s strategic planning.

AnalysisAs the war between Russia and Georgia reaches a simmer and the diplomatic front becomes the point of focus, some interesting details about how this war was implemented are surfacing.

In the months leading up to the war, Tbilisi repeatedly levied charges of increased intelligence activity by the Russians inside Georgia and its two secessionist regions, Abkhazia and South Ossetia. It is to be expected that Russia would have heavy and entrenched intelligence links inside the former Soviet state — and doubly so within the two separatist enclaves that Russia protects. But in the decade since former Russian President and current Prime Minister Vladimir Putin came to power, he has strengthened and empowered Russian security services, particularly the Federal Security Service (FSB). Moreover, Putin has positioned his KGB or FSB cronies into many high stations of Russia’s government and institutions. It is not an understatement to say that the intelligence services are running Russia.

Having served in the KGB (now FSB) during the Soviet era, Putin naturally would look at the problem of Georgia through an intelligence officer’s lens and would be inclined to use the tools and methods of the security services. While not a military man himself, Putin clearly understands military strategy. Stratfor sources in Moscow have also indicated that the FSB laid extensive groundwork in Georgia and took a significant — perhaps leading — role in the strategic planning of the campaign. The source argues that this role was decisive in Moscow’s success. This was seen in how the war was carried out.

Ultimately, the Russian military is something of a blunt instrument. Operations in Chechnya showed that it is anything but subtle in its methods. In part, this is the reality of a large, conscripted military that relies on quantitative force. While details are still emerging about how the Georgian campaign was conducted tactically, the way Russia held at Tskhinvali in South Ossetia over the weekend before pushing forward to Gori (and from Abkhazia to Senaki at the same time) could suggest restraint and coordination on the part of the commanders on the ground — commanders either influenced or directed by FSB personnel, according to one Stratfor source. If it were up to the Russian military, it would have simply tidal-waved over the country.

Stratfor has already argued that Russia’s execution of the campaign was neither flawless nor exceptional. However, it achieved a number of both political and military objectives, and the way operations — especially later in the game — were carefully tailored and coordinated is noteworthy. Russia planned how far to push it and was perfectly willing to draw back from captured regions to achieve maximum military and political gain, with minimum military and political risk.

In thrusts to Gori and Senaki, the Russian military now appears to have pushed forward and retreated a number of times. There is little indication that heavy fighting with Georgian forces was the cause of this. Instead, it seems that the military was playing the part for the Kremlin — keeping pressure on Tbilisi by pushing in and through Gori, but also pulling back in order to give Moscow deniability when it served the Kremlin. Essentially, the entire campaign could have been tailored to minimize political fallout while moving beyond South Ossetia and Abkhazia to devastate the Georgian military’s war-fighting capability. This is a subtle balancing act the Russian military is not known for, and it could indicate that the FSB’s role in planning and execution was more signifcant.

Also, the entire Russian-Georgian war was as much a propaganda action for Russia as it was a military conflict. The nearly seamless way in which it was done — complete with the use of U.S. reporters embedded with Russian forces and Russian reporters at Washington press conferences — could only have been masterminded by the top echelons of the FSB.

The FSB is willing to make bold moves like invading Georgia, but the entire campaign was fought in a way that would minimize political fallout and ensure that other countries would not get involved — something the Russian military has no experience in doing.

But the Russian military and the FSB have a long and volatile history of simply not getting along or trusting each other. Having someone from the intelligence community run not just the country, but every facet of that country, has pushed the military into the back seat. Moreover, Putin has been slowly but deliberately pushing for military reform and modernization (including changes unpopular with the old guard) while being careful not to create a threat to his leadership. Many in the military who were so proud of the late Soviet years and so utterly devastated by the 1990s simply could not see how ineffective and corroded the military had become. The Russian military was overflowing with people — like the four generals who have been either sacked or moved within the past year — who only remembered the military’s former Soviet glory.

It has taken someone from outside the military institutions (Putin) to step back and assess how best to revive the Russian military. Putin has placed former security personnel in many key military and defense posts, keeping the military subservient to him while looking at how best to reshape the military into a tool useful to the Kremlin.

But in doing this, Putin could be turning the military into a tool for the FSB. This would be like the CIA in the United States telling the Pentagon how to wage a war. The two might cooperate (and have turf wars), especially in Afghanistan, but one does not control the other. In Russia, the leadership has always balanced the two sides or simply crushed them both equally, but Putin is changing how the shots are called and might be cultivating a whole new toolbox for the FSB to work with.

The sight of Russian tanks rolling through Georgia was shocking yet familiar. Images flash back of Chechnya in 1994 and '99, Vilnius '91, Afghanistan '79, Prague '68, Hungary '56. Before that the Soviet invasions, courtesy of the Ribbentrop-Molotov pact, of Poland and the Baltics in '39 and '40. Kazaks, Azeris, Tajiks, Ukrainians remember -- from family stories and national lore -- their own subjugation to Russian rule.

AP Other empires such as Britain and France adjusted, not without difficulty, to the fall of their distant domains. Far more of Russia's essence is tied up in the Imperium, and it barely tried to find a new identity after the Soviet Union fell. The war in Georgia marks an easy return to territorial expansion (here Moscow has taken chunks of Georgia for itself) and attempted regional dominance.

Russia is a relatively young nation, dating from after the turn of the previous millennium. Drive the highway from Gori to Tbilisi and you'll find signs of Christianity that predate Russia by some five centuries. Georgians will tell you, with a mixture of pride and scorn, that their culture and history goes back a lot deeper than Russia's.

Starting out as an isolated village, Muscovy grew by conquest, swallowing up lands and people at a dizzying rate, especially from the 18th century on. Though Russian nationalists claim otherwise, as a nation the Russians are a mix of Slavic, Asian and other European ethnicities. This national hodgepodge was wrenched together by an authoritarian czar who claimed his right to rule from the heavens.

The Soviets were even better empire builders. Vladimir Putin, whose formative years were spent in Dresden spying on the East German colonials, comes from this tradition.

Never in the history of empire was the periphery generally so much more advanced than the center. With each move into Europe, from the partitions of Poland to Stalin's great triumph at Yalta, Russia acquired what it didn't have -- an industrialized economic base, better infrastructure and above all contact with Western civilization. Aside from St. Petersburg and a few other towns, Russia itself stayed a largely rural, Eastern Orthodox backwater. It knew it too.

In the Soviet days, Russian culture, language and history were pressed on its captive nations. But these nations in and outside the U.S.S.R. never gave up their dreams of freedom. Starting in the Baltics, and then spreading to the Caucasus and Ukraine, their resurgence was, as much if not more than Mikhail Gorbachev, the internal force that brought about the Soviet Union's collapse. They easily imagined life without Mother Russia. Russia could not reciprocate. To dominate is to be.

Boris Yeltsin tried to give Russians an alternative narrative. For his own political survival he had to stoke a Russian reawakening against the Soviet behemoth. After leading the charge against the 1991 putsch, Yeltsin put forward democracy as a unifying and legitimizing idea for the new Russian state. But that went up in smoke with the shelling of the Russian parliament in 1993, the first Chechen war and the rise of the oligarchs.

Yeltsinism was fully discredited by the time Vladimir Putin took over. He doesn't give the impression he ever believed in its main precepts of partnership with the West and freedom at home. For a while, Mr. Putin pushed some economic modernization, including cleaning up the tax code. His instinct, however, led him toward the past. The so-called humiliations of the Yeltsin era, which to most Westerners who lived there then looks like a golden era of relative normalcy, called for vengeance. The young democracies around Russia that chose a future in the West were to be forced back into Moscow's sphere of influence.

It is curious to hear Russia invoke the Kosovo precedent to justify its invasion of Georgia. There is an unintended parallel. Two former communist apparatchiks (Mr. Putin and Slobodan Milosevic) took over weakened, demoralized countries and thought expansionist nationalism would lead them to glory.

The second Chechen war consolidated the Putin hold on power in 1999 -- as stirring up the Serbs in Kosovo did for Milosevic in the late 1980s. The Serbs were then like the Russians are today. A European nation, though somewhat set apart by Orthodox Christianity, that opts out of the Western mainstream. This choice, alas, requires victims like Kosovo Albanians or Georgians -- small nations whose fate the outside world might ignore.

The images from Georgia brought me back to a late May evening 12 years ago in Murmansk, the seat of Russia's Northern Fleet. There ahead of elections, I'd met a smart and amiable teacher in the Russian Arctic city who, true to his nation's reputation for hospitality, invited me home for vodka and some dinner.

Hours into our meeting I'd mentioned that perhaps Russia, then looking for its place, might aspire to become something like prosperous Norway just across the border from Murmansk -- a country able to provide its people a good life. It stopped him cold. In this grim setting, my new friend spat in disgust and said, "Russia is no Norway. It is a great power. It is destined to be great." Mr. Putin would doubtless agree.

Alex NabaumReaders' CommentsShare your thoughts on this article.Post a Comment »Read All Comments (125) »THE acute phase of the crisis provoked by the Georgian forces’ assault on Tskhinvali, the capital of South Ossetia, is now behind us. But how can one erase from memory the horrifying scenes of the nighttime rocket attack on a peaceful town, the razing of entire city blocks, the deaths of people taking cover in basements, the destruction of ancient monuments and ancestral graves?

Russia did not want this crisis. The Russian leadership is in a strong enough position domestically; it did not need a little victorious war. Russia was dragged into the fray by the recklessness of the Georgian president, Mikheil Saakashvili. He would not have dared to attack without outside support. Once he did, Russia could not afford inaction.

The decision by the Russian president, Dmitri Medvedev, to now cease hostilities was the right move by a responsible leader. The Russian president acted calmly, confidently and firmly. Anyone who expected confusion in Moscow was disappointed.

The planners of this campaign clearly wanted to make sure that, whatever the outcome, Russia would be blamed for worsening the situation. The West then mounted a propaganda attack against Russia, with the American news media leading the way.

The news coverage has been far from fair and balanced, especially during the first days of the crisis. Tskhinvali was in smoking ruins and thousands of people were fleeing — before any Russian troops arrived. Yet Russia was already being accused of aggression; news reports were often an embarrassing recitation of the Georgian leader’s deceptive statements.

It is still not quite clear whether the West was aware of Mr. Saakashvili’s plans to invade South Ossetia, and this is a serious matter. What is clear is that Western assistance in training Georgian troops and shipping large supplies of arms had been pushing the region toward war rather than peace.

If this military misadventure was a surprise for the Georgian leader’s foreign patrons, so much the worse. It looks like a classic wag-the-dog story.

Mr. Saakashvili had been lavished with praise for being a staunch American ally and a real democrat — and for helping out in Iraq. Now America’s friend has wrought disorder, and all of us — the Europeans and, most important, the region’s innocent civilians — must pick up the pieces.

Those who rush to judgment on what’s happening in the Caucasus, or those who seek influence there, should first have at least some idea of this region’s complexities. The Ossetians live both in Georgia and in Russia. The region is a patchwork of ethnic groups living in close proximity. Therefore, all talk of “this is our land,” “we are liberating our land,” is meaningless. We must think about the people who live on the land.

The problems of the Caucasus region cannot be solved by force. That has been tried more than once in the past two decades, and it has always boomeranged.

What is needed is a legally binding agreement not to use force. Mr. Saakashvili has repeatedly refused to sign such an agreement, for reasons that have now become abundantly clear.

The West would be wise to help achieve such an agreement now. If, instead, it chooses to blame Russia and re-arm Georgia, as American officials are suggesting, a new crisis will be inevitable. In that case, expect the worst.

In recent days, Secretary of State Condoleezza Rice and President Bush have been promising to isolate Russia. Some American politicians have threatened to expel it from the Group of 8 industrialized nations, to abolish the NATO-Russia Council and to keep Russia out of the World Trade Organization.

These are empty threats. For some time now, Russians have been wondering: If our opinion counts for nothing in those institutions, do we really need them? Just to sit at the nicely set dinner table and listen to lectures?

Indeed, Russia has long been told to simply accept the facts. Here’s the independence of Kosovo for you. Here’s the abrogation of the Antiballistic Missile Treaty, and the American decision to place missile defenses in neighboring countries. Here’s the unending expansion of NATO. All of these moves have been set against the backdrop of sweet talk about partnership. Why would anyone put up with such a charade?

There is much talk now in the United States about rethinking relations with Russia. One thing that should definitely be rethought: the habit of talking to Russia in a condescending way, without regard for its positions and interests.

Our two countries could develop a serious agenda for genuine, rather than token, cooperation. Many Americans, as well as Russians, understand the need for this. But is the same true of the political leaders?

A bipartisan commission led by Senator Chuck Hagel and former Senator Gary Hart has recently been established at Harvard to report on American-Russian relations to Congress and the next president. It includes serious people, and, judging by the commission’s early statements, its members understand the importance of Russia and the importance of constructive bilateral relations.

But the members of this commission should be careful. Their mandate is to present “policy recommendations for a new administration to advance America’s national interests in relations with Russia.” If that alone is the goal, then I doubt that much good will come out of it. If, however, the commission is ready to also consider the interests of the other side and of common security, it may actually help rebuild trust between Russia and the United States and allow them to start doing useful work together.

Mikhail Gorbachev is the former president of the Soviet Union. This article was translated by Pavel Palazhchenko from the Russian.

The Russian aircraft carrier “Admiral Kuznetsov” is ready to head from Murmansk towards the Mediterranean and the Syrian port of Tartus. The mission comes after Syrian President Bashar Assad said he is open for a Russian base in the area.

The “Admiral Kuznetsov”, part of the Northern Fleet and Russia’s only aircraft carrier, will head a Navy mission to the area. The mission will also include the missile cruiser “Moskva” and several submarines, Newsru.com reports.

President Assad in meetings in Moscow this week expressed support to Russia’s intervention in South Ossetia and Georgia. He also expressed interest in the establishment of Russian missile air defence facilities on his land.

The main stock index is down 55% in four months, banks are starved for capital and teetering on the brink, the currency is at a one-year low and the government is throwing money at the problem. We're not talking about Wall Street.

The current carnage on Russian markets comes amid global market turmoil. But the dive in Moscow began before the wider world cared about AIG's balance sheet, and its chief causes are home-grown. To wit, the bill for eight years of Putinism is coming due. And a Kremlin leadership that only weeks ago brimmed with menacing self-confidence is struggling to slow this financial free fall.

APThe first sign of trouble came in late July when Prime Minister Vladimir Putin lashed out at a Russian coal and steel company, Mechel, for alleged price gouging and appeared to threaten personally its chief executive. Mechel shares fell by a third, and the incident sent a chill through the market as a whole. Investors woke up to the systemic risk to property rights and the lack of any rule of law in Russia. They did so belatedly, we'd add, considering the attempted or successful expropriation of Yukos, BP and Shell assets and the blatant use of state resources to menace private business.

Another trigger was last month's war in the Caucasus. The Russians routed the Georgian army in four days and annexed -- in all but name -- its provinces of South Ossetia and Abkhazia. Then Russia got routed by the global economy. Since the war started, investors have pulled more than $35 billion from Russian markets. Russian businesses are having trouble getting access to international financial markets, as foreign lenders wonder if they can get paid back. Some $45 billion in foreign debt held by Russian corporates must be refinanced by the end of the year, and the cost of doing so is rising.

Other emerging markets have been hit hard in recent weeks, particularly the natural resource-driven economies. But Russia's is the worst performing market in the world this year. The decline from the all-time high in May wiped out $680 billion in value; Russia's entire GDP was just $1,286 billion as of last year. On Tuesday, the main ruble-denominated index was off 11.2%, the steepest fall since the 1998 ruble crisis. It plummeted yesterday as well, before regulators stopped trading for good at midday.

Each of the past three days, the Russian central bank injected over $10 billion into the money market, and also moved to prop up the ruble. The Kremlin yesterday lent the country's three largest banks $44.9 billion. Thanks to the oil and gas windfall of the past few years, Russia has built up a $573 billion reserve war chest that can tide the financial system over for a while and avoid a rerun of the 1998 crisis.

Not forever, especially if oil prices continue their fall. Russia's economy is hugely dependent on natural resources. In good times, the Kremlin pocketed the billions and didn't worry about pushing economic reforms. The outside investment needed to diversify was discouraged by the Kremlin's backsliding on the rule of law. Now the drop in crude prices is squeezing the country's blue chips and the Kremlin's coffers, even though on the current budget the Russian state will break even with oil at $70 a barrel or above.

Long reluctant to criticize the thin-skinned Putin regime, businesses have started to voice their unhappiness. On Monday Putin sidekick and President Dmitry Medvedev hosted 50 leading businessman at the Kremlin, and acknowledged that the Georgia war contributed to the country's economic troubles. He said Russia didn't want to be isolated, but added, "If they" -- meaning the West -- "try to stop us accessing certain markets there will be no catastrophe for the state or for those sitting here."

As it has turned out, much faster than anyone realized or hoped during the Georgian war in August, Western governments haven't had to do anything to have Russia pay a price for its aggressive behavior. Which is fortunate, considering the weak stomachs in Europe and at the State Department for any serious response to the war. Investors did it for them.

The war has also exposed the fiction that Russia is the next China -- an authoritarian political regime that's stable, predictable and on a path toward becoming a free-market economy. It's authoritarian all right, but it lags China on other counts. After this war, Russia is unlikely to join China in the World Trade Organization. Georgia and Ukraine, another potential target for Russian aggression, are in that club and in a position to block entry. But the bigger hurdle ought to be the WTO's standard that candidates be "market-based" economies ready to respect the commitments and rules of this international organization. By this standard, Russia doesn't belong there, or in the OECD or G-8.

Perhaps the Russian people, who give their leaders high marks in opinion polls, will begin to see the economic toll from Putinism and question whether their country is well-served by this leadership.

Geopolitical Diary: A Russian Financial Power Play in IcelandOctober 8, 2008 | 0120 GMTThe Russians are coming. Only this time they are invited and by Icelanders of all people.

Icelandic Prime Minister Geir Haarde confirmed Tuesday that indeed the NATO member state and staunch U.S. ally against the Soviet Union during the Cold War had asked for a $5.43 billion (4 billion euro) loan from its “new friend” Moscow and that it did so because it found no aid coming from its Western allies. Iceland’s economy has been devastated by the global credit crunch that destroyed its banking sector and currency. Icelandic banks have been either nationalized or propped up by the state, but the krona (Iceland’s currency) is falling precipitously. The Russian loan may have staved off a speculative run on the krona that ultimately saves the country from complete bankruptcy.

It was hard not to notice the bitter and wounded tone of Haarde, particularly when explaining why Reykjavik turned to Moscow for help in the face of rejection from his country’s equally financially stressed Western allies. That tone may soon be repeated by a number of countries as the financial crisis picks off the weakest and shakiest economies, a tone that will certainly be welcomed by the Kremlin looking to extend its influence globally.

Of course, the game of handing out money to allies in exchange for influence is not new to Moscow. The Soviet Union based its foreign policy in large part on buying allies (particularly in the Middle East and Africa), a strategy that to an extent helped bankrupt Moscow and bring the Cold War to an end. Thus far, post-Soviet Russia has been extremely careful and frugal — even the Iceland financial package is a loan and not a grant — in part because of its experiences and lessons from the Soviet era and in part because there was not any money to be shared with potential allies in the aftermath of the Soviet collapse.

Recently, however, that frugality has changed dramatically. Rising commodity prices have allowed Russia to build a massive $750 billion reserve fund and its energy and metals behemoths (and their oligarchs) to amass fortunes and power that could easily be mobilized to serve the Kremlin’s interests. While it is true that the Russian stock market recently plunged to lows not seen since the Ruble Crisis of 1998, drawing calls from analysts around the world that Russian economy is in tatters, the relevance of equity markets to the Russian economy is not altogether clear. The stock market was created to bring in foreign investment, but with the Russian coffers swollen with energy money the Kremlin is not too worried — for the moment — about the flight of foreign capital.

Russia is therefore well positioned to use its vast reserves to play the key role of a creditor nation during the woeful time of a global credit crunch — a position of great power. And Iceland is not the only country vulnerable to the financial crisis.

Ukraine, Greece, Slovakia, Bosnia-Herzegovina, Austria, Romania and Hungary are some of the other countries that, for whatever reason, may be extremely vulnerable and of particular interest to Russia. These all have a particularly troubling combination of high public debt, a government budget deficit and a high government tax dependency. While predicting endangered economies is not an exact science, it is safe to argue that during a global credit crunch these economies would be put under extreme pressure to fund their budgets. For Moscow, the goal would be to aid countries where Russian capital intervention would both irk the West and advance its position in overall Russia-West brinkmanship. Furthermore, Russia would want to target countries where a few billion dollars would go a long way.

Countries with close ties to the West are ideal. For example, a financial package given to a country like Greece — which has an enormous public debt and high budget deficit and is therefore particularly endangered — would certainly be a useful strategic poke at the West. It is important to underscore that the Russian intention in these situations would not be to lure Athens or Reykjavik to allow a Russian military base or to abandon its alliances with the West. The idea would be to turn significant players in the West’s clique from skepticism toward Russia to a genuine appreciation for its generosity. The more members of NATO and the European Union that are indebted — both literally and figuratively — to the Kremlin for their financial survival, the more the proverbial window of opportunity will be cracked open for Moscow to act globally and in its periphery.

Russia of course has to play this strategy very carefully. The current state of affairs, in which Russia is the creditor nation and the West is either not unified (the European Union) or self-centered (the United States) will not last long. Russia’s upper hand in terms of liquidity is a transitory situation and the Kremlin knows it. It therefore will have to choose its battles carefully, placing strategic roadblocks in places where the West will have to take time to unwind Russian influence once the financial crisis is over, thus delaying the moment when the West focuses its attention fully on the Kremlin.

Just wanted to note that in this financial crisis we are back to referring to the meeting of the most important economies of the world as "G-7", not G8 (with Russia), even though the Russian stock market has lost 2/3 of its value since May. A result of the war this August in Georgia?

The Financial Crisis in RussiaStratfor Today » October 28, 2008 | 1012 GMT Editor’s Note: This article is part of a series on the geopolitics of the global financial crisis. Here, we examine how the global financial crisis will impact a resurgent Russia.

Standard & Poor’s rating service lowered Russian long-term sovereign credit rating outlook to negative Oct. 23 because of projections that Moscow will need to inject more credit into the faltering Russian banking sector. A credit rating indicates the agency’s estimation of a state’s ability to maintain debt payments, so in this case S&P believes that ongoing efforts to address the financial crisis could overtax the Russian government. The cut in debt rating comes as the yield on Russian government 20-year bonds has increased eight basis points (a 0.08 percent rise in yield) to 10.94 percent, indicating that the foreign appetite for Russian bonds is quickly dropping as credit becomes scarce and investors seek investments they feel are more secure. The bond yield of Russia’s largest company, natural gas behemoth Gazprom — which is also the single greatest source of Russian total external debt — has thus skyrocketed, and it now stands at almost 700 basis points above emerging sovereign debt. Meanwhile, the Russian stock exchange closed below 550 on Oct. 24, wrapping up a precipitous fall that has destroyed 80 percent of its value since May.

International Economic CrisisThe Financial Crisis in the United States The Financial Crisis in Europe Hungary: Hints of a Wider European Crisis The Financial Crisis in Japan and China Methodology by George FriedmanThe International Economic Crisis and Stratfor’s Methodology Related LinkThe Geopolitics of Russia: Permanent Struggle A comprehensive flight of investor capital is occurring in Russia for a number of reasons. This situation is placing great pressure on the Kremlin to use its capital reserves — the third largest in the world — to prop up the Russian banking sector and the main engines of the Russian economy: the energy and mineral sectors. In the short run, Moscow’s massive capital reserves will allow it to weather the global liquidity crisis and increase government control over all sectors of the economy. In the long run, however, Russia might face a dearth of capital as it drains its coffers trying to pump cash into the system, putting vital capital expenditure projects (such as improving infrastructure, improving oil and natural gas field development, and military spending) on hold to the detriment of its ability to face off with the West. The result will be an economy that has far more in common with the Soviet Union than with post-Soviet Russia — even post-Soviet Russia under Vladimir Putin. And that will affect Russia’s bid to reassert itself globally.

The Russian Golden Goose and the Liquidity CrisisRussian state coffers contain roughly $650 billion. The money is actually divided into three different funds, with the international capital reserves accounting for the bulk ($515.7 billion as of Oct. 17) and the rest split between the National Welfare Fund and the Reserve Fund, Moscow’s long-term security blankets. The coffers have been filled with the profits from steadily rising commodity prices over the last five years, allowing Russia to amass a $50 billion budget surplus at the end of 2007 and pay off the majority of its externally held government debt.

The $650 billion figure, however, is down from $750 billion as recently as 3 months ago. This is due to the cost of the August intervention in Georgia (which cost $16.1 billion) combined with the huge number of liquidity injections (to the tune of roughly $90 billion) the state has had to make since the Sept. 16 and Oct. 6 Russian stock market crashes and in response to concerns about the stability of Russian banks.

Liquidity injections into the stock market and Russian banks were necessary because nearly $63 billion in foreign investment was pulled out of Russia immediately following the August intervention in Georgia. Foreign investors also withdrew because of a previous loss of confidence due to Russian disregard for investor rights, and because of a loss of confidence in Russian company and government bonds as the global liquidity crisis took root.

While embarrassing, the flight of foreign money from the stock market is not the Kremlin’s primary concern. The bigger problem is the collapse of confidence in Russian bonds and borrowers, the premier sources of foreign capital for funding the expensive projects of Russian energy and mineral giants.

Russian companies, as well as foreign investors looking to invest into Russia, prefer to raise capital through bonds because it does not mean taking input from foreigners on how to run their business. It also allows them to keep everything about their firms, from ownership and management structures to profits and managerial techniques, out of the public eye. Foreign bond holders only want a return at an agreed-upon date. With political risk created by the Georgian war combined with the global liquidity crisis, however, foreign investors have abandoned Russian bonds for safer investments, such as U.S. Treasury bills, elsewhere. This has left Russian companies without the ability to raise crucial capital.

Kremlin Tools to Combat the Liquidity CrisisTo inject liquidity into the system, the Kremlin first turned to the oligarchs, forcing them to inject between 10 percent and 30 percent of their total wealth into the markets and banks to shore up the financial system immediately after the Sept. 16 stock market crash. At an all-night mandatory meeting held in the Kremlin following the crash, oligarchs were ordered to plunge cash into their own faltering stocks, buy collapsing financial institutions directly, or simply fork over the cash and/or shares. Using oligarch money has the positive effect, at least from the Kremlin’s perspective, of further consolidating control over the oligarchs’ assets and decision making.

This move quickly drained the oligarchs of much of their on-hand cash, however. In the weeks since, they have largely seen their cash reserves exhausted by the combination of appeasing Kremlin demands and suffering losses from various margin calls. (In essence, they have been forced to immediately repay loans taken out to buy stock.) The only way for the oligarchs to repay these loans is to sell assets at cut-rate prices or stocks at depressed prices. So while the oligarchs are still rich in assets, they are now poor in cash, and are being forced to liquidate parts of their empires to remain liquid.

RUSAL kingpin Oleg Deripaska has been forced to ditch his Canadian auto parts venture, while Norilsk Nickel’s Vladimir Potantin is shopping around for buyers for his platinum mine in the U.S. state of Montana. Both have had to divest themselves of massive amounts of stock. In total, the 20 richest Russian oligarchs have lost personally or through their companies a combined $188.4 billion — and that figure comes only from publicly available information. While the oligarchs are still extremely wealthy, they have now been forced to give up or have lost sizable chunks of their fortunes, particularly in assets abroad. This renders them, as a tool for shoring up liquidity, a spent force for the purposes of stabilizing Russia.

This means that the Kremlin now has to pick up the slack with its own resources — namely, its $650 billion cash reserves — and that the worst of the liquidity problems are yet to come. In particular, Moscow will have to figure out how to isolate itself from the foreign liabilities accrued by its banks, both government and private, and by its energy and mineral companies.

Total Russian external debt as of June stood at $527.1 billion, of which banks — whether private or government owned — owed a whopping $228.9 billion. Domestic credit in Russia, which lacks a good system for circulation and accumulation, has always been scarce. This means Russian banks rely upon access to foreign capital to fund everything from car loans, mortgages and personal loans to Russian energy and mineral companies’ capital expenditures.

The problem with such a sizable debt is that while the ruble depreciates against the rising U.S. dollar because of Russian economic instability, capital flight and decreasing commodity prices (which act upon both the ruble and dollar simultaneously, increasing the dollar and decreasing the ruble), foreign debts made out in dollars begin to appreciate in value. Since the crisis began, the ruble has already dropped by a quarter, increasing the cost of servicing dollar-denominated debt by a like amount. The Kremlin will have to act fast to cover the debts of the banking sector, or else the debt might become unserviceable for the banks, which take in most of their revenue in rubles.

This of course assumes that the Russian consumers who took out the mortgages, car loans and personal loans will continue to service their debts, and that there will not be any significant bank run — far from a certainty given the notoriously bank-skeptical Russian populace. If the ruble continues to depreciate, Russian consumers might be unable to service their debts. This applies particularly to loans originally denominated in foreign currencies. The problem is widespread in Central Europe and the Balkans, and especially in Hungary, where foreign banks used the Swiss franc for consumer lending.

The other issue is the debt of the 14 largest Russian energy and mineral companies, which account for $142.1 billion of $185.4 billion non-bank privately held external debt. Particularly notable are the debts of Gazprom ($55 billion), Rosneft ($23 billion), RUSAL ($11.2 billion), TNK-BP ($7.5 billion), Evraz ($6.4 billion), Norilsk ($6.3 billion) and LUKoil ($6 billion). These debts are held in various dollar-, euro- and yen-denominated loans, and bonds, which are usually dollar-denominated. Unlike domestic Russian banks, which receive revenue in rubles, the energy and mineral giants will not have to contend with the problem of the appreciating dollar, because they receive their commodity-driven revenue in dollars. (All of world’s commodities are priced in dollars.) But these firms will have to contend with ever-decreasing revenue from which to service their loans as oil and minerals/metals decline in price. Oil and nickel are already down 55 percent and nearly 80 percent, respectively, from their peaks.

The Kremlin’s ChoiceThe Kremlin thus faces a choice between not spending its cash and risking countrywide private defaults by its banks and major companies, which would in turn trigger a complete collapse of the Russian financial system, or spending its reserves to shore up the system and severing nearly all links between Russia and the wider world. This really is not much of a choice, as the threat of further dollar appreciation against the ruble is nearly inevitable. Therefore, the Kremlin will most likely spend approximately $400 billion to buy up all of Russia’s foreign-held debt — $230 billion in bank debt and another $180 billion in various companies’ debts. (Russia lacks the option of printing currency, since the ruble is not worth much to begin with.)

Such a step would obviously drain Russia’s coffers, taking the maximum total reserves down to $250 billion. But this will have an upside. In addition to ending all outstanding foreign funding vulnerabilities, this move would make the entire Russian economy and financial system owe nearly all of its debt directly to the Kremlin. In one stroke, Russia will have recreated the financial system of the Soviet era, with all the political control that implies. (Ironically, by repaying the nearly $400 billion of its companies’ and banks’ foreign loans, the Kremlin will inadvertently also inject much-needed liquidity into Western and Japanese banks. The end result will go a long way toward recapitalizing the global banking system.)

But not all would be smooth sailing under this scenario. Russia needs massive amounts of capital to keep its long-term energy production and export industries healthy, and with energy prices weak, it simply cannot even attempt to generate the necessary funds itself. As foreign capital dries up and commodity prices fall, Russian energy companies will have no choice but to forgo capital expenditure projects that are vital for revamping Russia’s Soviet-era transportation infrastructure and increasing dwindling production in maturing oil and natural gas fields.

Russia has an excellent tool for addressing part of this problem. Unlike oil, natural gas prices do not respond to market change; fixed pipeline infrastructure combined with the difficulty of transporting the stuff gives the supplier much more pricing power. As the world’s largest exporter of natural gas and Europe’s largest supplier, Russia already has plans in the works to increase its prices to more than $500 per 1,000 cubic meters as of Jan. 1, 2009. Russia is not only certain to stick to this planned price hike despite falling global energy prices, but it also could increase the price further to buy itself some more time and income.

Despite the direness of its situation, Russia is not about to collapse. In reality, all this means is that Russia’s experience in grafting some elements of Western capitalism to the Russian political system is over. (Moscow’s bid to adopt Western economics wholesale died years ago.) Having a system where Russian firms cannot tap foreign capital markets and are instead dependent on the state is precisely how the Soviet state maintained operational and political control. It might not be central planning per se, but it is not too far off. For a number of reasons, such an economic system makes sense for a country as large and difficult to invest in privately as Russia.

But while Russia might hold together domestically, the Kremlin will need to rethink some of its broader international objectives. Increased international influence is a pricey affair, whether it means buying Ukrainian elections; shoring up Moscow’s presence in Georgia; pressuring the Baltic states; cozying up to Cuba, Nicaragua, and Venezuela; restoring its influence in the Middle East; fostering anti-ballistic missile defense social activism in the Czech Republic; or just generally increasing its intelligence activities abroad and updating its military capacity.

Ultimately, Russian stability in the post-Yeltsin era has depended on having free cash to direct where needed, when needed and in almost limitless quantities. For that, reduced access to international capital and a mere $250 billion reserve fund in an era of falling income might prove insufficient. Russia might be on the brink of a massive political consolidation into a stronger core state, but the liquidity crunch cannot help but limit its wider options. Simply put, Russia might be able to speak with a clearer voice, but its ability to project that voice has just been constrained.

Geopolitical Diary: Seems Like Old Times at the KremlinNovember 12, 2008

Russian President Dmitri Medvedev on Tuesday sent a draft law to the Duma that would make a series of structural changes to the Russian government, including extending the president’s term. The draft law is no surprise; Medvedev laid out the changes in his first state address Nov. 5. But the details of the changes are quite interesting. The presidential term would be extended from four to six years, legislators’ terms would increase from four to five years, and there would be a shift in the way members of the legislature’s upper house, the Federal Council, are chosen.

Following the State of the State address last week, Medvedev’s aides had quickly explained that the extension of the presidential term would not affect Medvedev’s stay in office, but rather would apply to the next president. The Russian media have erupted with speculation that Prime Minister Vladimir Putin will be returning to the presidency, which he left earlier this year. Under Russian law, a president can serve more than two terms, but not consecutively. This has led to rumors in the press that Medvedev could step down in the coming year, allowing Putin to step into his old shoes and serve out the remainder of Medvedev’s term before potentially being elected to another two terms of his own. All told, it would mean that Putin could be in office for another 15 years.

According to Stratfor sources, Putin might lay the groundwork for such a move at the convention for United Russia — the ruling party — on Nov. 20, where he is to give a “campaign-style speech.” It does not really matter if Putin is president or prime minister; in either position, he is the one driving the train in Moscow. But he has allowed Medvedev to act as president, particularly in the decision-making process during the Russia-Georgia war and the financial crisis.

According to what Stratfor has heard from sources in Moscow, Putin has not yet decided whether to return to the presidency. The main reason he would want to return is that Medvedev isn’t seen as the authoritative figure Putin was in the same role — and with Russia attempting a resurgence on the global scene, it needs a powerful leader to command respect. On the other hand, Putin has never been interested in the daily tasks that go along with being chief, such as meeting with middle- or low-tier world leaders or making constant speeches. He is much more interested in decision-making — and the power that goes along with it.

This is where one of the key, but mostly overlooked, changes proposed by Medvedev comes into play. Though the details of this change are still murky, it calls for members of the Federal Council — who represent each of Russia’s 81 federal regions (republics, oblasts, krais, okrugs and the two largest cities) — to be chosen by the ruling party in each region. Since Putin’s United Russia controls most of the country already, and any stray regions most likely will be under that party’s control soon, the shift would put United Russia in charge of essentially the entire country, at the regional level.

Stratfor has watched as United Russia evolved from being merely another party in the country to the main party in Russia. Now it appears to be transforming into “the Party” — much like the Communist Party of the Soviet Union, which controlled the top echelons of the Russian government and held power in every region of the Soviet Union. Medvedev’s reforms officially would give United Russia that sort of power.

Moreover, this gives whoever is in charge of the party the bulk of power in Russia. Under most Soviet leaders, the ruler of “the Party” was the ruler of the country. But in modern Russia, the president must have no party affiliation, according to a social law — which is why Putin took the helm of United Russia only after becoming premier. This tradition can be changed, but thus far, it is not a part of Medvedev’s large government overhaul plan. Which leaves us wondering whether the shuffle in organization and positions is just about Putin returning to the presidency, or whether something larger — the question of who exactly will control “The Party” — is in play.

A year ago, Russia was in an odd place between oppressive stagnation and a glimmer of possible change. The ruling party, United Russia, had just consolidated its hold on the parliament in a rigged election; the presidential transition was revealed as the farcical anointment of a handpicked successor to Vladimir Putin—the docile Dmitry Medvedev, who quickly promised to make Putin prime minister. Yet some Russian liberals, and sympathetic Westerners, harbored at least modest hopes that Medvedev might prove more liberal than Putin and that the division of power between president and prime minister might weaken Russia's neo-autocracy.

Today, the winds of change in Russia are blowing again—harsh winds that may yet turn into a storm.

The liberalization from above turned out to be a non-starter, despite Medvedev's declaration that "freedom is better than non-freedom." Any hopes of a thaw, or a Putin-Medvedev fissure, were crushed when Medvedev's first 100 days ended with the war in Georgia. (Whatever Georgia's responsibility for triggering this war, it was preceded by years of provocation and manipulation by the Kremlin—intended to destabilize a government perceived as unfriendly and send an assertive message to the West.)

The surge of "patriotic" sentiment that followed Russia's victory threatened to take the country even further down the authoritarian road. But history works in mysterious ways.

While Western sanctions in response to the war proved short-lived, Russia paid a heavy price for its victory in the flight of foreign capital—which both predated October's financial crisis and exacerbated its effects in Russia.

The crisis revealed the clay feet of the Putin/Medvedev regime, not only showing the extent to which its relative prosperity was tried to high oil prices but also exposing the fakery of its feelgood propaganda machine. While state-controlled television news avoided the word "crisis"—except with regard to the West—Russian citizens rushed to convert rubles to dollars. Polls by the Public Opinion Fund found a sharp drop in confidence in the mainstream media. By late December, close to half of Russians said that media reports on the economy were biased and minimized economic problems; 30 percent (up from 23 percent in November) said that "journalists know the real state of the economy but are not allowed to tell the truth."

Trust in Putin and Medvedev may suffer as well. Bizarrely, over 80 percent of those polled recently still approved Putin's performance as prime minister—though only 43 percent thought Russia was headed in the right direction. Yet, of the 17 percent of Russians who watched Putin's live televised question-and-answer session on December 4, fewer than half were satisfied with his answers.

The first rumblings of discontent came after the government announced a hike in custom duties on imported used cars to help Russia's auto companies (run mostly by Putin cronies). Importing used cars from Japan is a major source of livelihood in the Far East, which responded with major protests that quickly became political. Some demonstrators openly denounced Putin, Medvedev, and United Russia; many angrily demanded television coverage. After a week of protests, a peaceful rally in Vladivostok was brutally broken up by the riot police on December 21; several journalists, too, were beaten and arrested. While television news ignored the incident, many mainstream newspapers did not. Remarkably, several local legislatures in the Far East have backed the protesters' demands. So far, the government has refused to budge. But what will happen if the ranks of protesters swell from hundreds to hundreds of thousands?

So far, the Kremlin's strategy for dealing with political opposition is a carrot-and-stick approach. Among the carrots: an effort to co-opt the opposition with the creation of a Kremlin-funded "liberal" party, the Right Cause, and the appointment of a prominent liberal politician, Nikita Belykh, to a governorship. The sticks include proposed legislation that would make it easier to convict dissenters of treason or espionage, at least if they have any foreign contacts, and to take such cases out of jurors' hands. These laws have drawn objections even from the governmental Public Chamber, a monitoring body meant to function as a collective ombudsman—though whether these objections will have any effect remains doubtful.

Unlike the Communist regime, the authoritarian Russian state still has room for some legal resistance—from the independent media to pro-democracy movements to judges who refuse to convict government critics under vague "extremism" laws. These small islands of freedom face a vastly unequal battle against the forces of repression; but the outcome in this battle is more uncertain than it has been in a long time.

Cathy Young is a contributing editor at Reason magazine. A shorter version of this article originally appeared in the Boston Globe.

Geopolitical Diary: Russia's Shifting Relations with Washington and WarsawMay 8, 2009Russian Foreign Minister Sergei Lavrov met with U.S. President Barack Obama in the Oval Office on Thursday, discussing plans for Obama’s trip to Moscow in July. The relationship between Russia and the United States has been tense to say the least, although the Russians have introduced an interesting twist.

The last major meeting between American and Russian leaders came April 1 in London, when Obama and Russian President Dmitri Medvedev met at the G-20 conference. That meeting went poorly.

The issues on the table at that time included NATO’s expansion to former Soviet states, U.S. ballistic missile defense (BMD) plans in Poland, nuclear reduction treaties and proposed NATO military supply routes to Afghanistan. The Russians entered that meeting convinced they had the upper hand: They believed the NATO expansion issue was locked away and the Americans would have to implore their permission in getting supplies to Afghanistan. Russian leaders believed they could force the United States into more complex negotiations and a compromise over Poland that would nix U.S. plans for a BMD installation and military assistance in Poland.

However, this was not the case.

Washington did not make a serious push for Moscow’s help on supply lines for Afghanistan; it also re-opened the issue of NATO’s relationship with Georgia and Ukraine, two former Soviet states. The Americans made it clear that the Polish issue would not be discussed. The only item on which Russia and the United States seemed to agree was the need to renegotiate strategic nuclear reduction treaties. Consequently, there were bitter tastes in many mouths after the April 1 meeting, and bickering between Russia and NATO has escalated during the past month:

Russia has blocked almost every move by Western governments to increase their influence in Central Asia. Russia has more than doubled its troop presence in breakaway regions of Georgia, from just over 3,000 to more than 7,600. NATO has initiated military exercises in Georgia, despite Russian troops’ presence just 20 miles from the location of the drills. In response, Russia has threatened to call off NATO-Russian relations. NATO officials in Brussels expelled Russian diplomats over a spy scandal that involved the imprisonment of an Estonian official; Russia in turn has expelled Canadian NATO officials.

From the outside, it would appear that the core issues between Moscow and Washington have been pushed back into the former Soviet sphere and NATO-Russian relations. For instance, Poland has been a central theme for Russia and the United States, with Moscow’s concerns about U.S. military plans there very apparent. Warsaw and Moscow have had a terrible relationship: This has been evident in energy cut-offs, trade embargoes, spy scandals, Poland’s blocking of Russian-EU relations and more. There has been undisguised contempt on both sides for years. Russia has not attempted to deal with Warsaw directly, but instead has pressured the United States to abandon independent and anti-Russian Poland.

This approach hasn’t worked.

It was significant, then, that Russia’s foreign minister spoke in positive terms this week about “improving Russian-Polish relations.” The day before leaving for Washington, and following a meeting with Polish Foreign Minister Radislaw Sikorski, Sergei Lavrov went so far as to call Poland “pragmatic” — a marked departure from the “hysterical” and “irrational” labels that Russia has used in discussing Poland in the past. He even noted that Moscow was looking to re-establish the Polish-Russian Committee — an intergovernmental body that has not convened since 2004, when relations between Moscow and Warsaw began to sour.

This change in rhetoric gives us pause. We do not believe that Poland is about to change its stance against Russia or for the United States. But the shift in tone by Russia indicates that Moscow is, at least temporarily, abandoning its tried-and-failed approaches of indirect pressure and threats — by telling the Poles instead that they may have options in forming an understanding with Russia.

Moscow is giving Warsaw an opportunity to change the tenor of relations. The timing of this shift was deliberate, designed to give Washington something to think about as Lavrov met with Obama. The hope appears to be that Russia can change things on the ground with Poland by offering a little honey instead of vinegar.

USSURIYSK, Russia -- As a young officer fresh out of a Soviet military academy, Alexander Primak was assigned to serve in this frontier city in the Russian Far East, eight time zones away from his home town in Ukraine.

He spent the next quarter-century in the region, moving from garrison to garrison, rising to the rank of lieutenant colonel. But he always dreamed of moving back west, counting on the government's promise to reward officers with apartments upon retirement.

Now, as the Russian government pushes ahead with an overhaul of the military that eliminates the positions of more than half the army's officers, Primak is jobless at age 46 and stuck in Ussuriysk waiting for an apartment he may never get.

"They're finding any excuse not to keep their promises," the gray-haired colonel said coolly, maintaining ramrod posture as he sighed over a plastic cup of coffee in a roadside eatery. "When we were young, we put the motherland first. We were ready to tolerate discomfort and wait for something better. . . . Of course I'm disappointed."

Low morale over pay and housing has afflicted the Russian military since the fall of the Soviet Union, but grumbling in the ranks is rising sharply as President Dmitry Medvedev attempts to carry out the most ambitious restructuring of the nation's armed forces since World War II in the face of a severe economic downturn.

The plan seeks to transform an impoverished, unwieldy conscript army built to fight a protracted war in Europe into a more nimble, battle-ready force that can respond quickly to regional conflicts. Key to the overhaul is a drastic reduction in the number of officers, who now account for nearly one in three Russian servicemen.

By eliminating thousands of officer-only units that were designed to call up draftees in wartime, and moving to a leaner, brigade-based structure, Medvedev intends to cut Russia's officer corps from 355,000 to 150,000, dismissing more than 200 generals, 15,000 colonels and 70,000 majors.

The plan has run into stiff resistance, with some top military officials resigning in protest and the Kremlin firing others. Retired generals and nationalist politicians have accused Medvedev and Prime Minister Vladimir Putin of scaling back Russia's military ambitions by essentially giving up on trying to maintain an army capable of confronting NATO.

Officers and troops have staged scattered demonstrations across the country against the reform plan, which would also shut dozens of military hospitals, schools and research institutes. A top complaint is the government's failure to provide apartments to all officers who are discharged after more than a decade of service -- a benefit that dates to the Soviet era and is written into Russian law.

The apartments are important because military pay has lagged far behind the cost of living and few officers have enough savings to buy homes. But the army has suffered a severe housing shortage since the fall of the Soviet Union, when a wave of servicemen in need of lodging returned to Russia. The military's construction efforts have been plagued by corruption and inefficiency, and hundreds of thousands of active-duty officers as well as retirees are on waiting lists for accommodations.

"Our military organization, our fleet, has cheated me with housing," said Vyacheslav Zaytsev, a former submarine officer who was interviewed on television during a protest in the arctic city of Murmansk. "A homeless officer is a shame for a nation," read one demonstrator's sign.

Here in the coastal province of Primorye, tucked between China, North Korea and the Sea of Japan, as many as 8,000 officers are expected to be discharged in the restructuring, local activists said.

"In our region, over 3,000 officers will be fired from the navy alone. . . . Where will these people go? How will they live?" said Boris Prikhodko, a retired vice admiral, before a protest last month in nearby Vladivostok, the provincial capital and headquarters of the Pacific Fleet.

Under the law, retiring officers can request apartments anywhere in Russia or ask to keep the quarters assigned to them by the military. But in practice, most who have been sent to the Far East have little chance of getting housing anywhere else when they are discharged.

When Primak became eligible for retirement, for example, he asked for an apartment in Kursk, a city near the border with Ukraine, where his parents still live. But he was released without being given any apartment. "I realized then that in Russia there are laws that are enforced, and other laws that are maybe for the future," he said. "What they say on television and do in reality are completely different."

He and other officers in this city of 150,000 say local authorities have fallen behind in housing construction and have begun using loopholes to discharge officers without giving them apartments.

Some have been given certificates that aren't worth enough to buy adequate homes. Others have been relieved of duty but formally remain registered with their units with minimal pay so commanders can keep them on waiting lists.

The worst off are officers stationed in the scores of military garrisons scattered across the countryside here, isolated outposts that have fallen into severe disrepair and are set to be closed as part of the shift to a brigade structure. Many of these officers have been told to just keep their current quarters, which often lack running water.

"These poor guys have to stay the rest of their lives in these ruined garrisons, without even minimal sanitation conditions," said Vladimir Kaplyuk, a retired colonel who heads an aid organization for veterans in Ussuriysk. "But after the units are shut down, there won't be anything left but these officers there. No troops, no jobs, nothing."

Technically, Kaplyuk said, the officers will be on waiting lists for housing. "But for how long?" he said. "Some officers here have been waiting 12 years already."

One 48-year-old lieutenant colonel assigned to a garrison near the Chinese border said he was offered a certificate that would have allowed him to buy only a tiny studio apartment on the outskirts of Ussuriysk or a rural house without a sewer system or running water. When he refused to take it, he was discharged without an apartment and had to sue his commanders to get reinstated.

"I felt like they seized me by the scruff of my neck and threw me away as if I was something useless," said the colonel, a veteran of the war in Afghanistan who asked to be identified only by his first name, Viktor, because he feared reprisals. "I'm upset with everyone -- the state, the commanders -- and there are many people like me facing similar problems."

Officers said it would be difficult for them to unite and pose a serious challenge because they are forbidden from engaging in political activities. They said local authorities have been effective at containing dissent, recently quashing an attempt by discharged officers to stage a protest and arranging for them to gather in a room outside the city instead.

The Kremlin has also pledged to upgrade equipment and weapons and to sharply increase wages for the officers who are not dismissed -- promises that have helped it win support in the military for the reform plan, analysts said.

But most of the planned cuts and dismissals have yet to be completed, and discontent could rise further if the economy worsens, they said.

Alexander Ovechkin, 50, a lieutenant colonel in Ussuriysk who retired without receiving an apartment, said officers are frustrated in part because Medvedev and Putin have raised expectations, repeatedly pledging to build enough housing for all discharged and active-duty officers by next year.

"You can feel the social tension and uncertainty," he said. "They have promised a lot. . . . I'd like to believe it, but my experience is too sad."

SummaryThe economic outlook for Russia appears bleak, and the road to recovery appears to be a long one. Rising unemployment, falling industrial production and the flight of foreign investment have put a dent in Russia’s massive currency reserves. However, the Kremlin has reasserted its power over the country and is in prime position to overcome its short-term challenges.

Editor’s Note: This is the eighth part in a series on the global recession and signs indicating how and when the economic recovery will — or will not — begin.

Russian President Dmitri Medvedev spoke of “alarming figures” when discussing the Russian economy during an exclusive interview with U.S. news network CNBC on June 2, pointing specifically to rising unemployment and falling industrial production. Medvedev also highlighted the expected Russian gross domestic product (GDP) decline, which according to him will be “no less than 6 percent” in 2009, but most likely close to 7.5 percent, a figure not seen since the fall of the Soviet Union.

Indeed, the prognosis for Russia appears grim. Russian GDP contracted by 9.8 percent year-on-year in the first quarter of 2009; industrial production has averaged double-digit contraction since January, and the April contraction equaled 17 percent year-on-year. Foreign investment has declined 30 percent year-on-year in the first quarter of 2009, and unemployment is likely to reach double digits by the end of 2009 — a dramatic increase over the 7.7 percent rate of 2008.

Moscow’s attempt to rein in the crisis is costing it its precious currency reserves and bloating its budget deficit after years of commodity-fueled surpluses. The budget deficit stood at 11 percent of GDP in April, and revenue destined for government coffers declined by a whopping 16.2 percent of GDP between April and May. Russia is staring at an approximate $100 billion budget deficit, a figure that is likely to consume all the cash in its Reserve Fund.

Russia does have a lot of money in its various government reserves, the combined value of which totals nearly $600 billion. (Its currency reserves stood at $409 billion on June 1, with the Reserve Fund at $100.9 billion and the National Welfare Fund at $89.9 billion.) There also is potentially another $40 billion to $50 billion in a third, less public fund. This is not too far from the $750 billion Russia had at the beginning of the economic crisis, but the expected $100 billion budget deficit in 2009 will further drain the reserves very quickly. The Russian Finance Ministry said recently that it might have to enter the international bond market to seek external funding for its budget deficit.

However, the effects of the current economic crisis do not foreshadow the decline of the Russian state. Conversely, the crisis has already strengthened the Kremlin’s grip on the country’s financial sector and its once-independent business elite, the oligarchs. With oil prices starting to rise again and the Kremlin now firmly in control of the country’s finances, it is likely that Russia will come out of the crisis with the Kremlin firmly in control of the economy, a natural order for Russia.

The Geography of the Russian EconomyRussia is blessed geologically and geographically, with its vast territory containing the world’s largest proven natural gas reserves, second-largest proven coal reserves, third-largest known and recoverable uranium reserves and eighth-largest proven oil reserves. However, from an economic development standpoint, Russia is anything but well endowed.

Throughout history, Russia has lacked navigable river transportation and access to ocean trading routes. Furthermore, Russia’s population is scattered across its vast territory, its natural resources are mostly found in unpopulated areas and a number of regional challengers constantly threaten its territorial integrity. Russia’s core is essentially the northeastern portion of European Russia. It has no natural borders, forcing Russia to strive continually to extend its control of territory to natural buffers (as far down the North European Plain as possible, to the Carpathian Mountains to the southwest, the Caucasus and Hindu Kush to the south and the Altai Mountains, Tian Shan and Stanovoy Range in the Far East).

With vast territory, constant expansion to the buffers and a lack of internal transportation, Russia requires a substantial amount of resources to maintain and defend its borders. It requires top-down management of the economy to focus resources on overcoming geographical impediments to development and security. As such, Russia is not a capital-rich country; it is starved for capital by its infrastructural needs, security costs, chronic low economic productivity, harsh climate and geography. Unlike the United States or the United Kingdom, where industrial and post-industrial economic development can spring forth with little or no direction thanks to favorable geography (intricate river transportation systems in the United States and access to oceanic trade routes for both) and the relative security of oceanic barriers, Russia has had to rely on firm state-driven economic development.

The current crisis has therefore returned the Russian economic system to its “natural” state, one in which the state is the main driver of activity. Gone is the experiment with nonstate-directed capitalism (roughly between 1991 and 2003), the Wild West, Russian style, where different elites and power groupings vied for economic and political power. The state’s ability to now marshal and focus resources toward infrastructure projects and resource exploration will help Russia in the short term. State direction and control will also help Russia focus its financial resources toward certain key foreign policy goals. In the long term, however, a lack of nonstate funding and private capital will be a problem, creating inefficiencies across the spectrum, particularly in areas where the state does not focus all of its resources. Additionally, Russia is facing a staffing problem. Running the vast country and its economy may simply be far too complex for its ever-more powerful executive.

The Current Recession: The Government Reclaims ControlTo understand how the Russian state has fully returned to its natural position as the helmsman of the Russian economy, it is important to examine the effects of the crisis on the Russian financial and corporate systems.

The main negative effect of the current crisis for Russia is the credit crunch, which is even more serious than low commodity prices. Credit in Russia is scarce and is therefore essentially one of the most important imports for the country. Businesses that are not state-controlled require funding from abroad because the state hoards capital and only lends it through political links. As a result, Russian private banks and corporations that had gorged on the cheap credit that flowed on the international markets since 2001 were particularly hungry for foreign capital. The government was not going to supply this capital by sharing the surplus from commodity sales, particularly if the capital was going to private entities it did not control. While the credit crunch does not hurt Russia’s government-controlled strategic industries — whose profits are in dollars anyway — it will cause a restructuring of the private financial and corporate sectors.

When the financial crisis hit in mid-September 2008, the first place foreign investors looked to pull capital from were emerging markets. Investors had already soured on Russia because of the Kremlin’s repeated meddling in foreign ventures, and because of Russia’s August 2008 intervention in Georgia (after which $63 billion in foreign investment was pulled immediately). Consequently, Russia was first on the list of places to withdraw from. Net capital outflows from Russia reached a record $130 billion in 2008, followed by $39 billion in the first quarter of 2009. Investors scrambled to sell their Russian assets and then used those rubles to buy dollars, francs, yen or gold. When this deluge of rubles hit the foreign exchange market, the ruble’s value fell off a cliff, stoking fears in Russia of another “ruble crisis” that could cause social discontent, as it did in 1998.

To counteract the effects of capital outflows pushing the ruble’s value down, the Central Bank of Russia (CBR) intervened, using its massive reserves of dollars and euros to purchase rubles on the open market. Had domestic banks not sold their ruble-denominated government handouts, the CBR’s $210 billion defense of the ruble might have been less expensive. But instead of letting the ruble crash, the Kremlin opted to manage the inevitable decline and has since bought the ruble enough times for it to be supported by real demand.

Though the ruble has now stabilized, its fall in value has been a considerable problem for private banks and corporations, particularly those not engaged in commodity sales. Russian enterprises that engaged in commodity exports had no problem with a declining ruble, because all of their revenue is in foreign currency, and their costs (salaries, operation costs, etc.) are in rubles. However, private banks and corporations that depend on internal demand and consumption for revenue — everything from regional retail banks to auto manufacturers — were suddenly left holding enormous foreign-denominated loans with no way to repay them. Russian banks and corporations owe approximately $400 billion in external debt over the next four years, with $90 billion worth of debt due between the second and fourth quarters of 2009 for banks alone (although it is estimated that about $40 billion of that may be held by foreign bank subsidiaries). In 2010, Russian banks will have to repay another $75 billion.

This is where the Kremlin has firmly stepped in. Its strategy from the very beginning of the crisis has been to consolidate the banking system under its control, with the primary source of capitalization being short-term, high-interest loans designed to quickly transfer banks’ obligations from foreign hands into the Kremlin’s steely grip. These loans will now be coming due for small regional banks, and it is likely that Russian state-owned banking behemoths Sberbank and VTB will greatly enhance their market share as result of the consolidation. The government is already the single largest creditor to banks, with 12 percent of all bank liabilities held by the state (mostly short-term loans with 8.5 percent interest). At the same time, banks and businesses that owe money to the state, but that the state does not want to save, will be allowed to fail, further consolidating different economic sectors in the hands of a few government-controlled or directly owned enterprises.

The culling of the Russian banking system will not be without its serious effects, and the transition from private hands to government ownership will not be smooth. The recession has already cut domestic demand, which is a problem because Russian industry (aside from extractive industry) depends almost solely on domestic consumers, with some trade with the other Former Soviet Union states — which are themselves facing a difficult recession. Domestic manufacturing was already down 25 percent in April year-on-year, a figure that foreshadows a mounting number of bankruptcies.

As bankruptcies rise and companies default on their loans, the rate of nonperforming loans (NPLs) rises as well; it is already more than 4 percent and predicted to reach 10 percent. NPLs are usually a solid gauge of how well an economy is performing, and in the Western world, a rate of above 3 percent is usually considered a serious problem. In 1998, the rate of NPLs in Russia hit 40 percent. However, according to Renaissance Capital’s calculations, even if the share of NPLs reaches 20 percent in the current recession, the required recapitalization (money the state would have to throw at the problem in order to fix it) would be less than $30 billion — easily covered by Russian state coffers. This is mainly because the government has already devoted a considerable amount of money to the problem. But though the banks now have abundant capital (albeit in foreign currency), they are loath to lend to businesses, thus further exacerbating the crisis.

Part of the Russian government’s latest recapitalization efforts is the $89 billion crisis measure fund, which was announced in April and will come on line sometime in June or July. A large part of the package, $52.9 billion, will go to various banking programs intended to recapitalize the banks; $23 billion will go to industry (the largest chunk to profit tax cuts that should benefit energy exporters and auto industry support); and $13.1 billion to labor market measures (including helping pensioners and unemployed people weather the crisis). The latter is intended to nip in the bud any social unrest stemming from rising unemployment. Russia’s steel industry, for instance, is strategic, has a powerful lobby and employs many people. Interestingly, while global steel demand and prices remain depressed, the utilization of production capacities at Russian steel companies has increased from around 57 percent to 71 percent since the beginning of the year. Despite the Kremlin’s measures, domestic steel demand remains weak, and thus the increase does not so much reflect increased foreign demand for Russian steel for government-funded infrastructure projects in China, India, and the Middle East. Rather, it reflects pressure by the Kremlin on Russian steelmakers to keep production going — therefore ensuring employment and stability in Russia’s one-industry towns — even if it means exporting steel below cost.

Social unrest, however, rarely causes revolutionary political change in Russia. The most famous examples of social unrest resulting in part from economic crisis, such as the revolutions of 1905 and February (March by the Gregorian calendar) 1917, essentially failed and had to wait for an elite-driven revolution (such as the October 1917) to succeed. In fact, when ruled by a focused and powerful central government, Russia’s population can be heavily strained, a fact that served Stalin’s industrialization efforts of the 1930s well. In order for the Kremlin to attain its goals of rapid industrialization, it drove much of the population into the ground. The social aspects of this effort are particularly notable and are different from other countries — particularly those in the West — in that the government’s economic efforts are not focused on profit, lowering unemployment and social stability. Russia’s main economic imperatives are dictated by its massive security costs, and are therefore concentrated on maintaining security and clamping down on social dissent and internal political or ethnic fragmentation, or both.

The current economic crisis is not without a social evolution of its own, although it is one where the government has turned on an elite group that threatened the Kremlin’s grip on Russia’s economy: the oligarchs. Because most successful regime changes in Russia are elite-driven, the oligarchs at one time represented a serious challenge to the Kremlin’s power. One of the most fundamental changes this economic crisis has had on the Russian economic system is that it has stripped the power of independent business empires run by the oligarchs. Indebted abroad when the crisis hit, the oligarchs were told that they would receive access to state funding only if they made substantial capital injections into the Russian economy themselves — particularly into the crashing stock market. In fact, Prime Minister Vladimir Putin made it a point to call all the major oligarchs to a meeting at the Kremlin as the crisis was unfolding, giving them a choice of either helping immediately or forsaking any future help from the state.

(click chart to enlarge)After that initial choice, the oligarchs were essentially told that they would either toe the Kremlin’s line on economic and political matters, or receive no help at all as foreign banks recalled their debts. Once the oligarchs were sufficiently bled of capital, the state offered to bail them out in select cases, with funding coming with strings attached. The oligarchs that survive the culling will be the ones the Kremlin has selected for survival, thus creating evolutionary pressures that will breed loyalty and subservience. An illustration of this dynamic was Russian steel magnate Igor Zyuzin, who gave the Kremlin billions, reducing his worth from more than $10 billion to just $1 billion. Only after he proved his loyalty, which at the time had been questioned due to a public fallout with Putin, did the state-controlled Vnesheconombank offer him credit.

(Click here for interactive chart)

Oligarchs will still exist as an elite, but they essentially will be reduced to the role of “capital emissaries” of the Kremlin to the West and the rest of the world. As such, they will be a powerful (but not independent) tool for the Kremlin’s foreign policy designs, another addition to the already-powerful arsenal that also contains intelligence networks and energy exports. Oligarchs may have acquired their fortunes through guile and luck, but they are also the most business-savvy elite — particularly in terms of Western business practices — in Russia. They know exactly how the West is run, having made many partnerships abroad through acquisitions and investments. This makes them extremely valuable, particularly as the Kremlin begins to direct its resources to foreign investments in strategic industries (such as energy), and for political reasons.

An example of this new role for the oligarchs is Oleg Deripaska, who at one point was the richest man in Russia. Deripaska is the chief of RUSAL, the world’s second-largest aluminum producer, and investment firm Basic Element. Deripaska’s wealth dropped from an estimated $36 billion to somewhere between $3 billion and $4 billion as he poured immense funds into his company and the Kremlin. As a reward for his efforts, Deripaska could become the chief of a rumored consolidated — and state- directed — metals conglomerate, giving him enormous power, but power that he will exercise at the whim of the Kremlin.

He also will be one of the Kremlin’s first “capital emissaries” abroad, as signified by a recent partnership between the state-owned Sberbank and Deripaska-controlled auto manufacturer GAZ in the purchase of German carmaker Opel. Deripaska was able to use his partnership with Canadian auto parts manufacturer Magna International Inc., and state funding through Sberbank, to form a partnership that will see Opel producing cars in Russia. This is exactly the sort of deal the Kremlin wants to encourage. It is also the kind of deal that the Russian oligarchs, with their considerable foreign business acumen, can provide — combining foreign partners acquired through their businesses, Russian state financing and impressive personal charisma to conclude politically motivated business deals.

With the purchase of Opel, Russia has come to the aid of a crucial European power and its leader, German Chancellor Angela Merkel, three months before general elections — a favor Merkel will not forget should she return to power, which she most likely will. In the past, Moscow would have been unable to so effectively pair government funding and oligarch business acumen. Now it can do so in pursuit of foreign policy goals. The Opel bailout is part of Moscow’s strategic move to widen the rift emerging between Germany and the United States, and is therefore an extremely important — and very well-played — foreign policy initiative, and not just any other business deal.

In the long term, greater government control will not resolve the endemic problems Russia faces. Combined with its geographic and infrastructural challenges, Russia is also facing a daunting demographic challenge — a low birthrate combined with rising prevalence of HIV/AIDS and drug use — and an overall economic overreliance on energy exports. The share of energy exports as a percentage of overall exports has increased from 50.3 percent in 2000 to 65.8 percent in 2008, despite rhetoric from the Kremlin that it had been seeking to diversify the economy since Putin’s arrival on the political scene in 1999. Furthermore, demographic and geographical challenges are continuing to depress Russian productivity, with Russian labor productivity at only one-third of U.S. productivity.

Nonetheless, when the account of the costs and benefits of the current financial crisis is made, it will show that the crisis cost the Kremlin much of its currency reserves and money accumulated during the boom years between 1999 and 2008. However, the crisis also returned the Kremlin to the driver’s seat of the Russian economy, which is in fact the natural state of affairs because of Russia’s geography and impediments to security. It is from this position that the Kremlin will face the much more serious challenge to Russian economic well-being in the next five years: decreasing energy exports caused by European diversification efforts away from Russian natural gas, and the continuing demographic challenge. While the current recession may have bolstered the Kremlin’s powers in the short term, how the Kremlin tackles the long-term crises will define Russia in the 21st century.

Putin's Plans for the Russian EconomyRUSSIAN PRIME MINISTER VLADIMIR PUTIN spoke at a Moscow banking forum on Tuesday about plans to liberalize the Russian economy. Specifically, he noted that a fresh round of government privatizations could soon begin, and that much of what was on offer would involve the government disposing of shares in companies that had been gained in exchange for bailouts during the global recession.

Nice words, but as Winston Churchill famously opined, “I cannot forecast you the action of Russia. It is a riddle, wrapped in a mystery, inside an enigma: but perhaps there is a key. That key is Russian national interest.” There is more to Putin’s speech than meets the eye.

“Putin is many things, but he is a Russian leader at heart — and Russian leaders tend not to rule with a particularly light touch or with generous forgiveness.”Let’s shine a light on where most of these shares came from. The Russian development model of the past six years focused on tapping international capital markets. Russia refused to give up actual managerial control or meaningful ownership, so its companies — and particularly its state companies — issued bonds or took out loans with foreign banks rather than issuing stock. The process flooded the Russian financial sector with lots of someone else’s money. For most Russian corporations — and doubly so for most Russian state corporations — this amounted to a financial free-for-all. From 2004 to 2008, some $500 billion flowed into Russia through this practice.

When the global economic crisis emerged, all of those funding sources dried up in a matter of weeks. With the collapse of commodity prices, the ruble shed a third of its value. But those loans and bonds still required repayment — and not in rubles, since they were foreign borrowings after all. As a consequence, the Russian economy suffered a contraction worse than that of any other major state in the world. The Kremlin was forced to bail out many firms, particularly government firms, to prevent a broad collapse. To accomplish this, the Kremlin had to reach into its sizable purse — not something that its leadership does easily, or without a plan.

It has always struck us as a touch odd that no one has yet been called on the carpet for this financial mismanagement. Putin is many things, but he is a Russian leader at heart — and Russian leaders tend not to rule with a particularly light touch or with generous forgiveness. A few well-placed people screwed up and negated five years of economic stability in a single, catastrophic season. Even in the United States, where rule of law is robust and pockets are deep, people are going to prison for the things they pulled in the sub-prime real estate market.

We find it hard to believe that Putin’s speech is the end of the story. In fact, we think it is just the beginning.

Russia's Message on Reshaping Its Nuclear Doctrine RUSSIA IS EXPANDING THE SCOPE OF ITS NUCLEAR DOCTRINE to include pre-emptive use of nuclear weapons, Russian Presidential Security Council Chief Nikolai Patrushev said in an interview published Wednesday by Moscow daily Izvestia. The former director of the Federal Security Service (the successor agency to the KGB) emphasized that nuclear weapons might be used in a preventive manner to repel conventional aggression in regional and even local wars. He was talking about the pre-emptive use of tactical nuclear weapons — which is, incidentally, an option the United States retains.

Russia considers its nuclear arsenal to be the pillar of its defensive military capabilities, and tactical nuclear weapons increasingly have taken a central role in its defensive scenarios since the collapse of the Soviet Union.

“It is unlikely that the Russians would employ nuclear weapons in any given scenario, but whatever they say publicly has next to no bearing on what they actually would do in an unknowable, future situation.”The potentially frightful speed of a modern nuclear exchange means there is little time for deliberation: To whatever extent possible, national command authorities seek to explore, understand and balance ahead of time the complexities and options of any given scenario. These scenarios are among the most closely guarded state secrets in the world. When and how they are updated is not generally a matter for public consumption.

And in any event, the fundamental reality remains: A nation’s senior leadership retains exclusive control over the use of nuclear weapons. Such a decision would be taken in a time of crisis, under a specific set of ultimately unknowable circumstances. Paper scenarios might inform that decision, but at the end of the day, the leader is not bound by them any more than he is bound by his country’s public nuclear doctrine.

Indeed, the manner in which a war is fought depends on any number of things — who struck first, who has the initiative, one’s strengths and weaknesses as well as the enemy’s, and so forth. But the first thing that goes out the window is the official, public statement about what that doctrine is or should be.

It is still unlikely that the Russians would employ nuclear weapons in any given scenario, but whatever they say publicly has next to no bearing on what they actually would do in an unknowable, future situation.

In other words, Patrushev’s interview was not an announcement to the Russian military that it is going to fight differently; such an announcement would come through different channels. Rather, Patrushev was telling the world that the Russian military is going to fight differently — whether that is the case or not. What is significant is not the public shift in nuclear doctrine, but the political decision to publicize it, and the timing of that decision.

It was no accident that the interview was published while U.S. Secretary of State Hillary Clinton was visiting Moscow. Patrushev was speaking to the West, and to the United States. He was attempting to shape Western thinking with three implicit points:

Russia is prepared to think in terms of the Cold War — with all the unpleasantness that could entail for the United States. Russia has tactical nuclear weapons and a doctrine for using them — pre-emptively, if necessary. Nuclear weapons are potentially on the table if fundamental Russian national interests are attacked, or even if Russia is threatened.

By CLIFFORD J. LEVYMOSCOW — Nearly two decades after the collapse of the Communist Party, Russia’s rulers have hit upon a model for future success: the Communist Party.

Or at least, the one that reigns next door.

Like an envious underachiever, Vladimir V. Putin’s party, United Russia, is increasingly examining how it can emulate the Chinese Communist Party, especially its skill in shepherding China through the financial crisis relatively unbowed.

United Russia’s leaders even convened a special meeting this month with senior Chinese Communist Party officials to hear firsthand how they wield power.

In truth, the Russians express no desire to return to Communism as a far-reaching Marxist-Leninist ideology, whether the Soviet version or the much attenuated one in Beijing. What they admire, it seems, is the Chinese ability to use a one-party system to keep tight control over the country while still driving significant economic growth.

It is a historical turnabout that resonates, given that the Chinese Communists were inspired by the Soviets, before the two sides had a lengthy rift.

For the Russians, what matters is the countries’ divergent paths in recent decades. They are acutely aware that even as Russia has endured many dark days in its transition to a market economy, China appears to have carried out a fairly similar shift more artfully.

The Russians also seem almost ashamed that their economy is highly dependent on oil, gas and other natural resources, as if Russia were a third world nation, while China excels at manufacturing products sought by the world.

“The accomplishments of China’s Communist Party in developing its government deserve the highest marks,” Aleksandr D. Zhukov, a deputy prime minister and senior Putin aide, declared at the meeting with Chinese officials on Oct. 9 in the border city of Suifenhe, China, northwest of Vladivostok. “The practical experience they have should be intensely studied.”

Mr. Zhukov invited President Hu Jintao, general secretary of the Chinese Communist Party, to United Russia’s convention, in November in St. Petersburg.

The meeting in Suifenhe capped several months of increased contacts between the political parties. In the spring, a high-level United Russia delegation visited Beijing for several days of talks, and United Russia announced that it would open an office in Beijing for its research arm.

The fascination with the Chinese Communist Party underscores United Russia’s lack of a core philosophy. The party has functioned largely as an arm of Mr. Putin’s authority, even campaigning on the slogan “Putin’s Plan.” Lately, it has championed “Russian Conservatism,” without detailing what exactly that is.

Indeed, whether United Russia’s effort to learn from the Chinese Communist Party is anything more than an intellectual exercise is an open question.

Whatever the motivation, Russia in recent years has started moving toward the Chinese model politically and economically. After the fall of the Soviet Union in 1991, Russia plunged into capitalism haphazardly, selling off many industries and loosening regulation. Under Mr. Putin, the government has reversed course, seizing more control over many sectors.

Today, both countries govern with a potent centralized authority, overseeing economies with a mix of private and state industries, although the Russians have long seemed less disciplined in doing so.

Corruption is worse in Russia than China, according to global indexes, and foreign companies generally consider Russia’s investment climate less hospitable as well, in part because of less respect for property rights.

Russia has also been unable to match China in modernizing roads, airports, power plants and other infrastructure. And Russia is grappling with myriad health and social problems that have reduced the average life expectancy for men to 60. One consequence is a demographic crisis that is expected to drag down growth.

The world financial crisis accentuated comparisons between the economies, drawing attention to Moscow’s policies. In June, the World Bank projected that China’s economy would grow by 7.2 percent in 2009, while Russia’s would shrink by 7.9 percent.

Politically, Russia remains more open than China, with independent (though often co-opted) opposition parties and more freedom of speech. The most obvious contrast involves the Internet, which is censored in China but not in Russia.

Even so, Mr. Putin’s political aides have long studied how to move the political system to the kind that took root for many decades in countries like Japan and Mexico, with a de facto one-party government under a democratic guise, political analysts said. The Russians tend to gloss over the fact that in many of those countries, long-serving ruling parties have fallen.

The Kremlin’s strategy was apparent in regional elections last week, when United Russia lieutenants and government officials used strong-arm tactics to squeeze out opposition parties, according to nonpartisan monitoring organizations. United Russia won the vast majority of contests across the country.

Far behind was the Russian Communist Party, which styles itself as the successor to the Soviet one and has some popularity among older people. The Russian Communists have also sought to build ties to their Chinese brethren, but the Chinese leadership prefers to deal with Mr. Putin’s party.

The regional elections highlighted how the Russian government and United Russia have become ever more intertwined. State-run television channels offer highly favorable coverage of the party, and the courts rarely if ever rule against it. United Russia leaders openly acknowledged that they wanted to study how the Chinese maintained the correct balance between the party and government.

“We are interested in the experience of the party and government structures in China, where cooperation exists between the ruling party and the judicial, legislative and executive authorities,” Vladimir E. Matkhanov, a deputy in Russia’s Parliament, said at the Suifenhe meeting, according to a transcript.

United Russia praises the Chinese system without mentioning its repressive aspects. And the party’s stance also appears to clash with repeated declarations by Mr. Putin, the former president and current prime minister, and President Dmitri A. Medvedev that Russia needs a robust multiparty system to thrive.

The two endorsed the results of Sunday’s local elections, despite widespread reports of fraud, prompting opposition politicians to call their words hollow.

Sergei S. Mitrokhin, leader of Yabloko, a liberal, pro-Western party that was trounced, said the elections revealed the Kremlin’s true aspirations. And the China talks made them all the more clear, Mr. Mitrokhin said.

“To me, the China meeting demonstrated that United Russia wants to establish a single-party dictatorship in Russia, for all time,” he said.

Throughout recent centuries, Russia has flirted with both the West and East, its identity never quite settled, and analysts said that under Mr. Putin, the political leadership had grown scornful of the idea that the country had to embrace Western notions of democracy or governing.

That in part stems from the backlash stirred in the 1990s, after the Soviet fall, when Russia faced economic hardship and political chaos, which many Putin supporters say the West helped to cause.

Dmitri Kosyrev, a political commentator for Russia’s state news agency and author of detective novels set in Asia, said it was only natural that the Kremlin would cast its gaze to the East.

“When they discovered that there was a way to reform a formally socialist nation into something much better and more efficient, of course they would take note,” Mr. Kosyrev said. “Everyone here sees China as the model, because Russia is not the model.”

The Kremlin Wars (Special Series Introduction): The War BeginsOctober 22, 2009 | 1954 GMT PDF VersionClick here to download a PDF of this report Strange things are happening inside Russia these days. Pro-Kremlin political parties have boycotted the parliament, our sources say lawsuits are about to be filed against some of the state's favorite companies, and rumors are circulating high within the Kremlin that the Russian economy is destined to be liberalized.

When looked at separately, each of these currents can be rationalized, for Russia has just recently completed elections and the global financial crisis is still hammering its economy. But a deeper look reveals instability inside what is normally a consolidated, stable and politically-locked Russia. Something much bigger and more fundamental is afoot: a war among the most powerful men of the Kremlin is coming.

Though Russian Prime Minister Vladimir Putin undoubtedly rules the country, he does not rule it alone. Over the past decade he has carefully crafted a balanced structure of power. Beneath him on the Kremlin's organizational chart are two very ambitious men: Deputy Prime Minister Igor Sechin and Deputy Chief of Staff Vladislav Surkov. Both of these men control vast swaths of the government bureaucracy, state companies and levers of power throughout the Russian system -- including the powerful Federal Security Service (FSB) and Military Intelligence Directorate (GRU).

It is the classic balance-of-power arrangement. So long as these two clans scheme against each other, Putin's position as the ultimate power is not threatened and the state itself remains strong -- and not in the hands of one power-hungry clan or another.

But having all major parts of Russia's government and economy fall under the two clans creates a certain structural weakness, a problem exacerbated over the past few years by the effects on the Russian economy of chronic mismanagement, falling oil prices and, most recently, the global financial crisis. All have weakened the state. Economic problems have become so acute that Putin, for the first time since his rise to power in Russia, has had to step back and reassess whether his system of balanced power is the best way to run the country.

The first to plant this seed of doubt were the liberal-leaning economists (known as the civiliki) within Surkov's clan, who went to Putin over the summer and told him the Russian economy had to be fixed and that they knew how to achieve that. As it happened, their plan called for excluding Sechin's clan -- especially those in the FSB -- from any involvement in economic matters. The plan presents, of course, a good opportunity for Surkov to grab hold of a critical issue in Russia and twist it to weaken his rival clan.

And it presents Putin with a pivotal dilemma. He likes the idea of fixing the Russian economy and making it work like a real economy, but it would mean throwing off the balance of power in the country -- the equilibrium he has worked all these years to achieve. And should this balance be thrown off, the effects could ripple throughout every part of Russia -- all levels of government, influential security institutions and even the country's powerful state-owned companies.

When these issues came to our attention some months ago, our first thought was that they were merely the machinations of just another high-level Russian source hoping we would promote his agenda. So we sought confirmation with a number of unrelated sources -- and we received it. The final convincing event in our minds was Putin's Sept. 29 declaration that some heavy economic reforms are indeed necessary. We cannot rule out that this could all be a disinformation campaign -- those are as Russian as vodka and purges -- but we cannot ignore our intelligence from such a broad array of sources, especially when it's combined with signs of political and economic instability now cropping up inside Russia.

So, herewith, STRATFOR presents The Kremlin Wars, a five-part series on the civiliki's ambitious plan to repair the Russian economy, the impact of that plan on the equilibrium of Russian power and the dilemma Putin now faces in trying to keep Russia politically stable as well as economically sound.

The Kremlin Wars (Special Series), Part 2: The CombatantsOctober 23, 2009 | 1507 GMT SummaryFormer Russian president and current Prime Minister Vladimir Putin is the indisputable executive power in Russia. His strength comes largely from his ability to control Russia's opposing political clans. Those two clans, which have been fighting for influence for most of the past eight years, are about to see fresh conflict as a new force, the civiliki, attempt to use Russia's economic crisis as an opportunity to reshape the country.

Editor's Note: This is part two in a five-part series examining the Russian political clans and the coming conflict between them.

Analysis:

Executive power in Russia indisputably rests with former president and current Prime Minister Vladimir Putin. Putin emerged as the supreme political force in Russia following the chaos that defined the 1990s precisely because he stepped outside of the fray and acted effectively as an arbiter for the disparate power structures. Although Putin's background is in the KGB (now called the Federal Security Service, or FSB) and he used these links in intelligence and security services to initially consolidate his reign, his power does not rest on those foundations alone. Putin's power comes from his ability to control Russia's opposing clans through favors and fear that he will give one clan the tools and authority to destroy the other.

The two main clans within the Kremlin are the Sechin clan led by Deputy Prime Minister Igor Sechin and the Surkov clan led by Russian President Dmitri Medvedev's First Deputy Chief of Staff Vladislav Surkov. These clans have been involved in almost continual competition for power for the past eight years. The group that may tip the balance in the coming clan wars is a newly defined class that is part of the Surkov clan: the civiliki. Putin's balance of power is intertwined with economic reform, and the civiliki -- a group of lawyers and economic technocrats -- want to use the economic crisis to reform Russia.

Sechin and the FSB and SilovikiSechin has deep roots within the FSB and the siloviki (a term which translates as "the strongmen") who are either directly linked to the FSB or are former security officers who have tried their hand at business or politics or both during their "retirement." Sechin and his group generally have a comparatively Soviet frame of mind, but without any ideological nostalgia for communism. They do, however, long for the powerful Soviet Union, which acted forcefully on the world stage, was respected by its foes and allies, was suspicious of the West and was led by a firm (bordering on brutal) hand at home. The economic system Sechin favors is one that harnesses Russia's plentiful natural resources to fund champions of industry and military technology, and essentially depends on high commodity prices to sustain itself.

Sechin's main source of power is undoubtedly the FSB. Although the FSB is fully loyal to Putin, this does not mean that it would not side with Sechin in a showdown against its opponents. Sechin uses the FSB as a talent pool from which to fill various positions under his command, including the chairmanships of various state-owned companies. This naturally irks the civiliki, who abhor the thought of intelligence operatives running Russian companies.

Aside from the FSB, Sechin's other pillars of power are the state-owned oil giant Rosneft and the interior, energy and defense ministries. The distribution of assets between the Sechin and Surkov clans is not random; Putin coordinated it precisely so that neither clan becomes too powerful. Sechin's control of Rosneft is therefore balanced by Surkov's control of Gazprom, the state-owned natural gas company. While Sechin gets control of the energy ministry, Surkov is in charge of the natural resources ministry and so on.

Surkov and the GRUSurkov rose through the ranks by proving himself invaluable in two key episodes of Russian state consolidation: the Chechen insurgency and the collapse of the largest Russian private energy firm, Yukos. Originally from Chechnya, Surkov played a role in eliminating a major thorn in the Kremlin's side: Chechen President Dzhokhar Dudayev. He also helped mastermind Moscow's win in the Second Chechen War by creating a strategy that divided the insurgency between the nationalist Chechens and the Islamists. His role in bringing down Yukos oligarch Mikhail Khodorkovsky began the all-important consolidation of those economic resources pillaged during the 1990s by disparate business interests.

Surkov's power base is the Russian Foreign Military Intelligence Directorate (GRU). The GRU represents both military intelligence and the military. Throughout Soviet and post-Soviet history, it has been the counterbalance to the KGB/FSB. The GRU is larger than the FSB and has a longer reach abroad, although it its accomplishments are not as well known as those of the FSB.

Also under Surkov's control are Gazprom; the ministries of finance, economics and natural resources; and the Russian prosecutor general. However, Surkov's rival Sechin controls the interior and defense ministries -- which have most of Russia's armed forces under their command. This limits the GRU's ability to control the military.

Surkov has sought to weaken Sechin and the FSB's position by constantly looking for potential allies to add to his group. In 2003, he formed an alliance with the heads of the reformist camp -- previously known as the St. Petersburgers -- that has proven to be invaluable in the context of the financial crisis. It is this group, the civiliki, that will help Surkov in his attempt to defeat Sechin, possibly for the last time.

The CivilikiThe civiliki are rooted in two camps. The first is the St. Petersburgers group of legal experts and economists that coalesced around Anatoly Sobchak, mayor of St. Petersburg from 1991-1996. Many of Russia's power players -- from Putin to Medvedev to key civiliki figures like Finance Minister Alexei Kudrin and German Gref, the former trade and economics minister and current head of Sberbank -- either worked directly under Sobchak or were somehow related to his administration. The second is the somewhat younger group of Western-leaning businessmen and economists that eventually joined the reformists from St. Petersburg.

The civiliki primarily want economic stability and believe Russia has to reform its economic system and move past state intervention in the economy that depends largely on natural resources for output. They try to be non-ideological and are for the most part uninterested in political intrigue. In their mind, economic stability is to be founded on a strong business relationship with the West that would provide Russia with access to capital with which to fund economic reforms. From their perspective, funding from the West has to go to rational and efficient companies that seek to maximize profit, not political power.

The first grouping of economic experts and Western leaning businessmen was led by Anatoly Chubais, who led the St. Petersburg group and was essentially in charge of various privatization efforts in the 1990s under former Russian President Boris Yeltsin. However, most of the St. Petersburg group was sidelined by the general failure of economic reforms enacted during this period. They were then almost snuffed out by the siloviki during the commodities boom from 2005 onward, leaving only Kudrin in a position of some power.

However, Surkov rescued the civiliki and incorporated them, giving them the powerful protector they lacked. Part of Surkov's plan was to turn one of the more prominent civiliki -- Medvedev -- into a superstar at the Kremlin. In Surkov's mind Medvedev was the correct choice since he was neither FSB nor GRU, though Surkov still felt he could influence him. This move helped Medvedev become president. Since Medvedev's ascendance to the presidency, and with Surkov's support, the other civiliki leaders -- Kudrin and Gref -- have been given even greater liberty to run the economy without fear of being replaced. Kudrin is handling the economy while Gref essentially is masterminding the banking system reform. The two of them work very well together, and with their allies Economic Minister Elvira Nabiullina and Natural Resources Minister Yuri Trutnev.

There is a rapidly brewing Surkov-backed conflict between the civiliki and Sechin. The strife is rooted in the simple issue of efficiency: The civiliki argument is that the Sechin clan wasted the good years of high commodity prices, crashed the Russian economy and weakened the state. This forces Putin to look at the conflict differently from previous clan battles. The Surkov-Sechin arguments typically are "just" about power, and thus about maintaining a balance. But the civiliki see Sechin's group not so much as a threat to them but as a threat to Russia. This is an argument that Putin has been able to ignore, but the latest economic crisis could have changed this.

The civiliki have a ready-made solution for the inherent problems in the Russian economy. Surkov's support for the civiliki, along with the financial crisis, has given Putin pause and he is giving their proposals consideration. However, the implementation of such reforms could reignite the feud between the clans and thus completely destabilize the delicate balance Putin has attempted to keep in the Kremlin.

The Kremlin Wars (Special Series), Part 3: Rise of the CivilikiOctober 26, 2009 | 1131 GMT SummaryThe global economic crisis has led the Kremlin to examine its decisions about running Russia's economy, financial sectors and businesses. A group of intellectuals including Russian President Dmitri Medvedev, called the civiliki, want to use the crisis as an opportunity to reform the Russian economy. The civiliki's plan will lead to increased investment and greater efficiency in the economy, but it will also trigger a fresh round of conflict between the Kremlin's two powerful political clans.

Editor's Note: This is part three in a five-part series examining the Russian political clans and the coming conflict between them.

In the aftermath of the global economic crisis, Russian Prime Minister Vladimir Putin has had to step back and examine the Kremlin's decisions on running the country's economy, financial sectors and businesses and the effects of a state-controlled system on investment, growth and the freedom of capital. In response, a group of Russian intellectuals called the civiliki, who are trained in economics, law and finance, have presented proposals on "fixing" the economy. The civiliki (a play on words, since the Federal Security Service and other members of the security class in Russia are called the siloviki) is a new group of economically liberal-minded (by Russian standards) politicians and businessmen. This group includes Russian President Dmitri Medvedev, Finance Minister Alexei Kudrin (who is also a deputy prime minister), Sberbank chief German Gref and many more.

The civiliki are not ideologues like the liberal Russian reformers of the 1990s and understand that the Russian economy and institutions must maintain some sense of balance with national security and national interests. But the civiliki also see how much damage the siloviki's control of key power structures and businesses has done to the Russian economy.

The civiliki's plan has one main goal in mind: to implement real structural reform in Russia's major economic sectors. This will improve competition, attract investment and purge waste and mismanagement. The plan has three parts -- purge the non-business-minded siloviki from positions of economic responsibility, introduce new pro-investment laws and partially liberalize the economy. It is an incredibly ambitious plan that would reverse laws designed by the FSB and Putin over the past six years. But the reforms are being spearheaded by the one man Putin trusts on all finance and economic issues: the civiliki's Kudrin.

Related LinksThe Kremlin Wars (Special Series Introduction): The War Begins The Kremlin Wars (Special Series), Part 1: The Crash The Kremlin Wars (Special Series), Part 2: The Combatants Kudrin is an experienced official, being one of the very few to make the transition from the Yeltsin era to Putin's Russia and having held a prominent position in every one of Putin's governments. The reason for his longevity at the Kremlin is simple: Rather than playing politics (to the extent usually seen in Russia) he is a technocrat who makes decisions based largely on the economic facts. His numbers-oriented mind, apolitical nature and competency as a manager are at least as important to Russia's relative financial stability as the strong energy prices of the past decade. Because of this, Putin values Kudrin's counsel greatly. Kudrin has also been an important buffer between Deputy Chief of Staff and First Aide to Vladimir Putin Vladislav Surkov and Deputy Prime Minister Igor Sechin, the heads of the Kremlin's opposing clans -- until now.

Kudrin's PlanPart 1: Purging the SilovikiThe most controversial part of Kudrin's plan is to purge the siloviki from positions of control over businesses and economic institutions. The siloviki clan, run by Sechin, took command of most of the Russian state firms over the past six years, and has -- by Kudrin's technocratic reckoning -- run them poorly. The siloviki run firms including oil giant Rosneft, rail monopoly Russian Railways, Russian airline Aeroflot, nuclear energy company Rosatom and arms exporter Rosoboronexport. The issue is that the siloviki have placed former KGB agents as heads of industry and businesses though many have no expertise as businessmen. According to Kudrin, it was largely Sechin's clan that sought access to international credit before the global economic crisis hit. Some $500 billion flowed into Russia via such connections, flooding the Russian financial sector with foreign capital. Sechin's clan spent the money as if it were free, often on irrational mergers and acquisitions that increased the clan's political power but had little economic purpose.

When the global recession occurred, all those funding sources dried up in a matter of weeks. And as the ruble declined, all of those loans still required repayment -- in the then-appreciated U.S. dollars, euros and Swiss francs. Consequently, the Russian economy suffered a contraction worse than any other major state in the world. The Kremlin was forced to bail out many firms, particularly those linked to Sechin's clan, to prevent a broader collapse. As part of the efforts to contain the crisis, the Kremlin also spent more than $200 billion on slowing the depreciation of the ruble so that the loans taken out by corporations and banks did not appreciate so much that they would not be repayable. From Kudrin's perspective, this was a huge cost to save companies whose managers had no business being in business.

Kudrin's plan is to weed out the security-minded officials now occupying leadership positions in industry and business, leaving only those who can actually run their institutions properly. But in doing this, Kudrin would strip Sechin's clan of massive economic and financial clout --something the siloviki would not stand for.

Part 2: Making Russia Investor-FriendlyNext, Kudrin's plan calls for legal changes that would make Russia more attractive to investors. One of the issues investors have with Russia is that there is very little legal protection, which leaves them highly vulnerable to hostile takeovers and becoming a target for the Kremlin or its power players. Moreover, the few legal authorities that do exist -- like the Federal Tax Service or the Audit Chamber -- often are tools for the Kremlin to help it pressure Russian and foreign firms that the government wants to either destroy or devour. The best-known case of this is the story of Yukos, whose owner Mikhail Khodorkovsky had evolved from businessman to ruler of Russia's vast oil sector and aspiring politician -- much to the Kremlin's ire. In 2004, the government brought the full power of a reinvigorated state to bear against Khodorkovsky and sent him to a Siberian prison. Other examples are of the Kremlin targeting energy assets belonging to foreign firms like BP and Royal Dutch/Shell to give those assets and/or control over projects to state-controlled energy firms.

In theory, the new investors' rights laws would protect businessmen and investors in Russia. The country has never had sound laws protecting investors' rights. However, it is most likely that any new laws will leave the state plenty of wiggle room to ensure that the Kremlin has significant control over investors' actions.

The next step to creating an investor-friendly Russia, according to Kudrin's plan, is to repeal the strict energy cap laws Putin put in place in 2007. These laws affect strategic industries and clarify which assets would be off-limits to foreigners. The sector affected most by these laws was energy. The laws limit foreign firms' ability to own more than 40 percent of a project in the country and forbid foreign firms from owning any projects involving the subsoil. These laws have made Russia an unattractive environment for foreign businesses to maintain or expand investments in energy projects, even though Russia is one of the world's most energy-rich countries.

But Kudrin's plan involves more than repealing the energy laws and allowing foreign firms to rush back in. There is a political side to the plan, masterminded by Surkov. The changes in Russian energy laws will allow foreign companies to own up to a 50 percent stake in projects, but if a foreign firm wants majority control then it must "trade" assets outside of Russia with one of the Russian energy behemoths. In essence, Russia will allow foreign companies to own majority stakes in large projects like the new fields on the Yamal peninsula in exchange for downstream projects in those companies' own countries. The goal is for Russian energy companies to not only move more into the downstream sector, but also have greater access to international markets -- something the Kremlin can use later for political purposes. STRATFOR sources say deals like this are already being negotiated with firms like BP, France's Total and EDF Trading, and U.S.-based ExxonMobil.

Part 3: ReprivatizationThe last part of Kudrin's plan is to reprivatize the vast number of companies the Kremlin has taken over in the last few years. Under Putin, the Russian state once again became the main driver of economic activity. Upon becoming leader of Russia in 1999, Putin set a goal to reverse the massive privatization that occurred during the 1990s -- like the housing and voucher privatizations and loans-for-shares schemes -- that, in most Russians' eyes, wrecked the country. Putin wanted to put the Kremlin back in control by consolidating its power over a slew of economic sectors, including energy, banking and defense. As of this year, the Russian state and regional authorities own approximately 50 percent of Russian businesses, according to Kudrin.

In the short term, Russian state control over strategic sectors made sense. It pushed out forces that were not too friendly with the Kremlin, like the oligarchs and foreign groups. But it also allowed the state to marshal its financial resources toward certain key domestic and foreign policy goals. Russian economic consolidation under the state brought about a stability that most Russians had longed for after the 1990s.

However, in the long term, the lack of non-state funding and private capital has become a problem, creating inefficiencies across the board -- particularly in areas where the state does not focus a great deal of its resources. Russia is traditionally capital-poor; therefore, any major economic overhaul needs to include the creation of an investment-friendly climate. The financial crisis made this clear; when the state took on the burdens of the failing private sector, it swallowed more businesses and industries but also took on their debt and need for cash.

Kudrin's plan is for the state to step back and start reprivatizing some 5,500 firms over the next three years -- which would drop state ownership in Russian firms by approximately 20 percent. The goal is to abandon some of the companies currently draining the government's coffers, but this step will also generate cash through the sales needed for the government to plug 2010's estimated budget deficit. Kudrin also believes that once the government starts to reduce its stake in companies, a more competitive environment will form in the Russian economy, allowing it to become more diversified.

Kudrin wants to ensure that the next reprivatization looks nothing like the feeding frenzy of the 1990s. In the minds of the civiliki, the failures of the 1990s were caused not only by investor greed but also by the state's failure to create a rational environment for privatization. The Russian state in 2009 is much stronger than it was in the 1990s, so Kudrin believes that the new round of privatization would be controllable, and the fact that the Kremlin would know who would gain control of each company would keep anyone hostile to Russian (read: Kremlin) interests out. The last thing Kudrin wants is a new generation of oligarchs.

Kudrin's plan would start with selling the state's stakes in companies purchased during the financial crisis, such as telecommunications giant Rostelecom and a series of banks, including Globex, Svyaz and Sobinbank. After that, the civiliki would like to consider companies such as oil giant Rosneft, banking giant Sberbank and railway monopoly Russian Railways for privatization -- a rather bold move since many of these companies are run by the siloviki.

In Putin's mind, the state consolidated the economy during Russia's identity crisis in the 1990s. Certain people, groups, influences and companies needed to be purged, in his opinion. Now that this has been completed, the government can step back and, in a highly controlled manner, start to reprivatize businesses. Putin is starting to believe that this is all just a cycle.

Easier Said Than DoneKudrin and the other civiliki's plans are a technocratic approach to a crisis that has been long in the making in Russia but was exacerbated by the global financial crisis. The civiliki's plans have very specific economic goals in mind, leaving out power politics. The plan is actually not a new one, but it is one that the siloviki have continually sidelined over the years as they placed national interests above economic reform. The civiliki have also never been powerful enough by themselves (even with one of their own as president of the country) to push through any of their reforms.

What the civiliki needed was for one of the truly powerful clan leaders in Russia to stand behind their reforms. Fortunately for Kudrin and the civiliki, one such leader -- Surkov, who serves as Medvedev's deputy chief of staff and first aide to Putin -- has done just that. However, Surkov is not interested in Kudrin's plan in order to reform the Russian economy. He sees the plan as something that will help him eliminate his rivals and consolidate his power.

The Kremlin Wars (Special Series), Part 4: Surkov Presses HomeOctober 27, 2009 | 1138 GMT SummaryVladislav Surkov, who serves as Russian President Dmitri Medvedev's deputy chief of staff and leads one of the Kremlin's two main political clans, has given his support to a plan to reform the Russian economy. The plan, proposed by a group of liberal-leaning economists called the civiliki, would help Surkov divest Deputy Prime Minister Igor Sechin, the rival clan leader, of power. Surkov has a specific list of goals that would help him tip the balance of power in Russia in his favor.

Editor's Note: This is part four in a five-part series examining the Russian political clans and the coming conflict between them.

Since the current recession has exposed the weaknesses in the Russian economy, the reform plans designed by Russian Finance Minister Alexei Kudrin and a class of liberal-leaning economists called the civiliki have caught Russian Prime Minister Vladimir Putin's attention. But before Putin could take Kudrin's plan seriously, the civiliki needed support from a major power player in the Kremlin. That man is none other than Russian President Dmitri Medvedev's deputy chief of staff and one of the two major Kremlin clan leaders, Vladislav Surkov. Surkov's motivation for supporting the civiliki plan is not the same as Kudrin's, however; the finance minister seeks a technical overhaul of the system, while Surkov's goal is to further his own political ambitions.

Surkov: The Gray CardinalSurkov is a unique player within the Kremlin. Being half Chechen and half Jewish, Surkov has long known that his pedigree would hinder him from ever holding Russia's top offices. Instead, he has positioned himself as the "gray cardinal" -- the one who masterminds power behind the scenes -- for Russia's leaders. Surkov came to this position by methodically climbing up the ranks and leaving a long list of former bosses behind him. Some of the most notable heavyweights Surkov helped bring down are Chechen President Dzhokhar Dudayev and oil oligarch Mikhail Khodorkovsky. Among his experience is a reportedly long and deep history with the shadowy Russian Military Intelligence Directorate (GRU) in the former Soviet states and Central Europe. He is now the GRU's chief strategist.

Related LinksThe Kremlin Wars (Special Series Introduction): The War Begins The Kremlin Wars (Special Series), Part 1: The Crash The Kremlin Wars (Special Series), Part 2: The Combatants The Kremlin Wars (Special Series), Part 3: Rise of the Civiliki Surkov has diversified his power base inside the Kremlin by securing the loyalty of the civiliki. These economically Western-leaning technocrats -- lawyers, economists and financial experts -- have been a powerful group since the fall of the Soviet Union, but have been leaderless since the 1990s after they were blamed for many of the economic troubles that wracked the country. Surkov recognized the liberal reformers' potential and offered them protection as part of his growing political clan.

The civiliki's loyalty has given Surkov an alternative power base to the GRU-linked bureaucrats and a new group of followers to maneuver into key positions in the Kremlin. A key example is Medvedev -- a civil lawyer by trade -- whom Surkov groomed to succeed Putin as president in 2008 to prevent another security official from taking the position. Not only did Surkov consolidate the liberal economists into one group but also came up with the term "civiliki" as a kind of play on words with the term "siloviki," which is the common name for Deputy Prime Minister Igor Sechin's clan and those in the FSB. The term civiliki stems from Medvedev's civil law degree and Surkov's desire to mold Russia's civil society.

Surkov has also sought to diversify his power across Russia. He is the chief ideologist behind the spread of nationalism throughout the country. He planted the seeds for a stronger Russia among the upcoming generations by creating the Nashi youth movement, which is reminiscent of the Soviet Komsomol youth. The Nashi -- estimated to number at 600,000 -- are tasked with promoting nationalism and loyalty to the state and helping to rid Russia of its enemies. They are a formidable force in the country and have been known to prevent anti-government rallies, pressure media critical of the Kremlin and make life difficult for foreigners and their businesses in Russia. The Nashi also promote academic achievement and hope to create the next generation of business and government leaders. They are fiercely loyal to Surkov, though he cannot legally be part of the organization because he is a government worker.

While Surkov has expanded his power throughout Russia, his greatest obstacle has been the rival clan led by Igor Sechin, which derives its power from the Federal Security Services (FSB, formerly KGB). It has never been a secret that the GRU and FSB have been adversaries since the creation of Soviet Russia, and it is only natural that Russia's two main clans are based within its two formidable intelligence agencies. Of course, Putin also had a hand in designing the current clan structure, splitting most government, economic and business institutions between the clans in order to balance them and prevent either the GRU or the FSB from becoming dominant.

But Surkov has been working to shift this balance by diversifying his clan away from the GRU and enveloping many different groups throughout Russia.

Tipping the Balance The civiliki's plan to fix the Russian economy is based partially on purging forces that have placed personal interests above economic soundness. In this, they are mostly targeting members of Sechin's clan -- the siloviki, or "strong men," who are former FSB agents put in positions of financial or business leadership. It is not clear that this is an entirely fair assessment, since so many in Russia were guilty of gorging on cheap credit during the boom years preceding the financial crisis. Regardless, the motivation for the civiliki's desire to purge the siloviki is not political; rather, it is because the reformers see no reason for FSB intelligence operatives to run businesses or financial institutions in Russia because they lack the applicable business skills. Surkov has latched onto this concept as a way to finally eliminate much of the Sechin clan's power.

Typically, the civiliki would be wary of Surkov's politicization of their plan. However, over the summer the gray cardinal approached Kudrin -- the architect of the civiliki plan -- with a deal: Surkov would support the civiliki's reform plan if Kudrin helped Surkov with certain aspects of his plan to purge Sechin's clan from power.

But Surkov's plan is very risky and complicated, and involves infiltrating all the proper channels through which he can pursue his enemies in the Kremlin and its companies and industries. Surkov's plan has two parts -- one that targets the siloviki's economic institutions, and one that targets their positions in the Kremlin.

Part 1: The Witch HuntFirst, Surkov intends to go after the main companies and institutions from which Sechin's clan derives either power or funds. Under the civiliki's plan, companies that have been mismanaged or are financially unsound -- according to their assessments -- would be privatized. Surkov is taking this a step further and wants to launch a series of inquiries and audits targeting very specific state corporations all controlled by the Sechin clan.

In Russia, it is common for companies being targeted by the Kremlin to face audits, tax lawsuits and other legal investigations intended to pressure the companies or lead them to being purged or swallowed up by the state. The problem is that for Surkov to attempt to use such a tactic against either state or pro-Kremlin companies, he would have to go through the Federal Tax Service or Federal Customs Service, which are run by Sechin's people.

But this looks like it could soon change. As part of Surkov's clan, Medvedev has jumped on the civiliki's economic reform bandwagon. Publicly, the president has recently started suggesting that he could begin investigating Russian firms he deems inadequately run. He said on Oct. 23 that there will be changes in how state firms are organized and even hinted that some firms could be shut down if they do not comply. This is occurring because over the summer, Medvedev and Surkov worked on drafting legislation through the Presidential Council on Legal Codification that would allow the government to "eliminate certain state corporations" -- meaning these new maneuvers would not require going through the usual proper channels. All the details on Medvedev and Surkov's ability to target firms are not known, but quite a few details have been leaked to STRATFOR that indicate Surkov's seriousness.

Instead of trying to purge Sechin's control over the Federal Tax Service and Federal Customs Service, Surkov has started to create alternative avenues for investigations into powerful Sechin-linked and state-owned companies by going through the Prosecutor General's office, run by Surkov clan member Yuri Chaika, and Russia's Supreme Arbitrage Court, which was taken over recently by pro-Surkov official Anton Ivanov. Also in recent months, the Prosecutor General's office has bolstered its legal authority to work with the Audit Chamber and Federal Antimonopoly Service -- both run by Surkov loyalists, Sergei Stepashin and Igor Artemev. These bodies are very powerful and important tools necessary to effectively targeting weighty state firms.

According to STRATFOR sources, preparations to start the paperwork on these investigations into certain state and Sechin-linked companies could begin as early as Nov. 10. This will be the test for Surkov to see if he can legally purge Sechin's influence.

The ChecklistSurkov has a very precise list of companies and agencies to investigate.

At the top of the list is Rosoboronexport, the state defense exports, technologies and industrial unit. Rosoboronexport is one of the largest moneymakers for the state after energy, earning $7 billion in foreign arms sales in 2009 with another possible $27 billion in contracted orders. Rosoboronexport is led by one of the larger FSB personalities, Sergei Chemezov, who uses arms sales and production for the FSB's political agenda. However, the agency has been accused of hindering the arms industry's ability to keep up with sales and of making it harder for Russia to gain new military technology. Rosoboronexport has also grown unwieldy in that it also now controls non-defense assets like carmakers and metallurgical companies. Furthermore, Surkov does not like the FSB overseeing an organization that should in theory fall under the GRU, since it is military-related.

Next on the list is Russian oil giant Rosneft, which is considered the rival to the Surkov clan's natural gas giant Gazprom. The two companies have been in competition since an attempted merger between them failed in 2005. The competition heated up when each company crossed into the other's territory, with Gazprom opening an oil subsidiary and Rosneft purchasing natural gas assets. Rosneft would be one of the more difficult companies for Surkov's group to target, since symbolically it is considered one of the state champions. It is also the key moneymaking enterprise for the Sechin clan.

After Rosneft are two government bodies that handle a large percentage of the state's money and are overseen by siloviki or Sechin-linked people. The Housing Maintenance Fund, which handles between $3 billion to $5 billion annually, is facing accusations that no one independent from Sechin has checked on where the funds are being spent and that the fund is simply a front for the FSB's activities in Russia. The second body is the large Deposit Insurance Agency (DIA), which oversees all registrations of deposits into banks in Russia and insures most of the country's banks -- an incredibly powerful tool for the FSB. Kudrin has been so incensed by what he has called the mismanagement and misuse of the DIA that he placed himself on the agency's board over the summer. But now Kudrin and the rest of Surkov's group want to purge the siloviki from these institutions.

Also on Surkov's list are:

State nuclear corporation Rosatom, which controls nuclear power, nuclear weapons companies and other nuclear agencies Olympstroy, the state corporation responsible for construction for the 2014 Olympics State-owned Russian Railways, one of the largest railway companies in the world, which is run by Sechin loyalist Vladimir Yakunin Avtodor, a new state-owned company responsible for revamping Russia's crumbling roads and highways (and therefore slated for vast amounts of investment to flow into its coffers) Aeroflot, Russia's largest passenger airline, which is chaired by former KGB agent Viktor Ivanov and has been struggling during the financial crisis It isn't clear what Surkov's ultimate goal is in investigating these companies -- whether he intends to destroy them, dismantle them, bring them under the control of his own clan or just privatize them so they are no longer in Sechin's grasp, or a mixture of these options. It is, however, clear that if he succeeds, Surkov would wipe out the siloviki's economic base and take away many of the tools they now use to operate effectively in the country.

Part 2: Kremlin Power PositionsThe second part of the plan has to do with Surkov's goal of purging a few key Kremlin politicians from their positions in order to tip the balance of power in his favor. The positions on this list include the president's chief of staff, the interior minister and Kremlin speechwriters.

Rumors are already beginning to fly around Moscow that Sechin loyalist Sergei Naryshkin, who had until recently been considered a rising star within the Kremlin, will be soon ousted from his place as Medvedev's chief of staff. Surkov sees Naryshkin's placement just under the president and over Surkov as a major infiltration by the Sechin clan into his realm. STRATFOR sources have indicated that Naryshkin will be ousted on the grounds that he never successfully implemented Medvedev's anti-corruption campaign.

Next on the list is the Interior Ministry, led by FSB agent Rashid Nurgaliyev. As interior minister, Nurgaliyev oversees 250,000 troops and his own police units. Recently, certain powerful pieces of the ministry, such as the Ministry for Emergency Situations, have been broken off and are now outside Sechin's control.

Lastly, within the Kremlin, pro-Sechin and FSB-trained speechwriters have been sidelined. These longtime writers, like Dzhakhan Polliyev, are being pushed aside and new Surkov-trained writers like Eva Vasilevskaya and Alexei Chadaev are now writing speeches for Medvedev, Putin and others. This is very important in how the leaders portray the small nuances of power within and beyond Russia.

The point of the governmental changes is for Surkov to get his people into positions of power so that his group can actually change policy and tip the balance of power inside Russia. Surkov is not looking to make Russia more efficient, like the civiliki are -- though it is the civiliki's plans giving Surkov the tools and opportunity to try to achieve his goals.

Surkov has legitimate justification for quite a few of his changes, based on the civiliki's recommendations to fix the economy, but the rest of the changes are an incredibly bold step to tip the balance of power.

Putin has noticed this boldness. Moreover, Putin has noticed a lot of the large changes Surkov has made over the past few years to get more power for himself and his clan and diversify his power base inside Russia.

The issues now are how much further Putin will allow Surkov to go, and what Putin is willing to sacrifice to clip the wings of the gray cardinal.

The Kremlin Wars (Special Series), Part 5: Putin Struggles for BalanceOctober 29, 2009 | 1139 GMT SummaryRussian Prime Minister Vladimir Putin is at a decision point. After spending a decade consolidating political and economic power, he has to choose how to deal with Russia's troubled economy. Amid tensions between the Kremlin's two powerful clans, Putin's decision could leave Russia's political structure in tatters.

Editor's Note: This is the final part of a five-part series examining the Russian political clans and the coming conflict between them.

AnalysisRelated Special Topic PageSpecial Series: The Kremlin Wars PDF VersionClick here to download a PDF of this report Russian Prime Minister Vladimir Putin has spent a decade gaining control over the Russian political and economic system. However, economic difficulties are affecting Russia's political structure, and the remedy could break the whole system apart.

After coming to power in 1999, Putin spent five years getting a firm grip on the Russian political system. During the next five years, he focused on managing the balance between the Kremlin's rival power clans -- one led by Vladislav Surkov, currently Putin's first aide and Russian President Dmitri Medvedev's deputy chief of staff, and the other led by Igor Sechin, currently deputy prime minister -- while recentralizing the economy. In consolidating the economy, Putin granted these clans the unchecked ability to put many of Russia's largest and most important firms under state control.

Related LinksThe Kremlin Wars (Special Series Introduction): The War Begins The Kremlin Wars (Special Series), Part 1: The Crash The Kremlin Wars (Special Series), Part 2: The Combatants The Kremlin Wars (Special Series), Part 3: Rise of the Civiliki The Kremlin Wars (Special Series), Part 4: Surkov Presses Home This consolidation generally was more about giving the state control over Russia's vast strategic resources and purging influence from abroad or from those hostile to the Kremlin than about making economically sound decisions. The benefits of high energy prices and a surge of foreign investment into Russia made up for shortcomings in economic planning. But those good times have ended. Energy prices are considerably lower now, and foreign investment has dried up. Furthermore, many of those put in charge of the firms now managed by the Russian state did not know how to run a business. These firms collapsed during the ongoing global economic crisis, deeply damaging the Russian economy.

Putin has not been blind to the mismanagement and overextension in the economic consolidation, or to the long-term outlook for the Russian economy. Finance Minister Alexei Kudrin has presented Putin with a proposal to partially liberalize the economy, remove the poor managers, and put business-minded people in charge of the firms in the hopes of returning those firms to functionality and possibly profit. Putin might be considering these reforms, but he is not putting himself in a position to spearhead them. Though any real reforms inside Russia will require his approval, Putin has made sure that Kudrin and Medvedev are the public faces of those reforms. That way, if the reforms work, Putin could take the credit for approving them; if they fail, Kudrin -- and possibly even Medvedev -- would take the fall.

But beyond the chances of success or failure for Kudrin's proposed economic reforms is another problem: The reforms could compromise the balanced political system Putin has worked so carefully to construct and maintain.

Putin's Dilemma Almost all of the managers that need to be purged under Kudrin's plan are members of the same power clan -- the siloviki, run by Sechin. Their removal would overturn the balance of power that has allowed Putin to rule for the past decade. It would leave Surkov's clan nearly unchecked in the Kremlin, and Surkov is already a powerful figure. He has been diversifying his power and, in addition to ruling over the Military Intelligence Directorate (GRU), now holds the loyalty of the liberal economic reformers called the civiliki, including Kudrin.

This is not the first time Putin has faced competing factions. During the first few years of Putin's presidency, he secured a landslide victory in 2003 Duma elections that gave his party, United Russia, dominance in the government. But Putin had to purge competing elements in the Yeltsin Family, the oligarchs, the security services and the St. Petersburg liberals. He wiped out some of these factions, like the Yeltsin Family and the oligarchs. He purged the non-loyal forces from the security services and St. Petersburgers and molded them into new factions. It is this second move that led to the rise of the clans led by Sechin and Surkov.

Putin's reign in Russia has always depended on balance, and now one of his top lieutenants is in a position to gain more power than Putin is comfortable with. Surkov knows he can never officially control Russia, but his ambition is to run it from behind the scenes. He has been fairly successful in this so far, but rival clan leader Sechin and his followers in the Federal Security Service (FSB) have always kept him and his GRU power base in check. Kudrin's plan, along with a few more changes to the system, would remove most of Surkov's obstacles. Moreover, Surkov is starting to garner a cult-like loyalty inside Russia that would make any Kremlin leader nervous. Putin knows Surkov is not trying to lead Russia officially, but his concern is that with Surkov's growing power, Putin could be displaced as Russia's chief decision-maker.

Besides Putin's desire to remain in control, the other concern is the response from the siloviki -- mainly made up of former KGB and current FSB personnel -- to a tip in the balance of power. The siloviki have never a secret of their loathing toward Surkov, his GRU and the civiliki. They would not stand for Surkov making the major decisions in the Kremlin. Russia can remain powerful only under authoritarian control, and that is something Surkov could never accomplish. Over the last decade, Putin managed to gain the loyalty of all the different Kremlin factions. Surkov could destroy that delicate balance.

Putin's Options Putin could disregard Kudrin's plan, leaving Sechin's people in their current positions and ignoring any plans for privatization. That would maintain the power balance, and contain Surkov to a degree, but the economic tools that Russia would have at its disposal would become far less useful. Or Putin could allow very limited business privatization and restructuring in order to keep the system stable in the short run, disregarding the long-term effects of the current economic model. This means that at any time, if Kudrin's plans start to destabilize Russia politically, those plans could be abandoned and Kudrin or Medvedev blamed for the effects. Putin would hardly be the first Russian leader to allow the economy to crumble in order to maintain political control.

Putin could also implement Kudrin's reforms but politically hive off Kudrin and the civiliki from Surkov's clan and establish the civiliki as their own clan. Since Putin is an expert at creating balance, there has been some discussion that if Sechin's clan is about to lose some of its power and Surkov is about to become stronger, Surkov's clan could be split in two to make up for the imbalance.

This looks very similar to Vladimir Lenin's tripartite system, which involved the creation of a system within the Kremlin in which three clans play off of each other to keep balance. In Lenin's system, the KGB was one clan, the GRU was another and the third was a non-intelligence group sometimes simply called the State. In Putin's model, the FSB under Sechin would continue as one clan, Surkov's clan would oversee only the GRU and then the civiliki would form the third group, led by either Medvedev or Kudrin. For Lenin, the tripartite system worked in the short term, but it ultimately failed as the intelligence groups infiltrated the State.

Surkov has already thought of this option and knows Putin is considering it. However, he views the civiliki as being too dependent to form their own clan and feels they will always have some level of loyalty to him. Considering that the civiliki generally lack leadership and do not have a power base independent of Surkov, a successful application of the tripartite model would require greater management skills than Putin currently has.

Putin's Attention Span Another problem for Putin is how much time and effort will be required to restructure Russia's economy, attempt to keep balance inside the Kremlin, and prevent a powerful Kremlin figure from threatening Putin's control. Putin and Russia have enough other concerns outside the country.

Russia is currently consolidating its periphery by bringing former Soviet states back into its orbit. Russia is in the middle of purging Western influence in Belarus, Ukraine, the Caucasus and Central Asia. Moscow is also working to prevent states further out on its periphery -- especially in Central Europe -- from becoming more pro-Western and allowing countries like the United States to have a presence there.

Russia has also been creating informal alliances with other regional powers like Germany, Turkey and Iran in order to counter the United States' global power and ability to work within Russia's sphere of influence.

If Putin is faced with a crisis at home, whether economic or political, he could have to pull back on Russia's bold moves abroad. Recently, with Russia consolidated and stable and the United States bogged down in Afghanistan and Iraq, Moscow has been able to make some major regional shifts in Eurasia. If this situation changes and Russia has to deal with domestic strife, then by the time Russia is stable enough to be able to act abroad again, the United States could once more be free to counter Moscow's moves.

It all hinges on Putin's decisions about managing Russia's faltering economy while maintaining control over those vying for power inside Russia. Putin has been successful when faced with such turmoil before, but it is unclear if that success can be repeated.

Russia's Growing ResurgenceEVIDENCE OF RUSSIA’S ROLE IN THE OVERTHROW of the Kyrgyz government Wednesday became even clearer Thursday.

Not coincidentally, members of the interim government that the opposition began forming on Wednesday have lengthy and deep ties to Russia. Russian Prime Minister Vladimir Putin was not only quick to endorse the new government, but he also offered the opposition Russia’s support — financial or otherwise. Interestingly, Russia on Thursday also sent 150 of its elite paratroopers to its military installation in Kant -– twenty miles from the capital of Bishkek –- leaving a looming suspicion that Russia could step in further to ensure the success of the new government.

Protests take place regularly in Kyrgyzstan. The fact that Wednesday’s protests spun into riots, followed by the seizure then ousting of the government, followed by the installation of a replacement government set to take control — all in less than a 24-hour period — are all clear indicators that this was a highly organized series of events, likely orchestrated from outside the country. Furthering this assumption were reports from STRATFOR sources on the ground that noted a conspicuous Russian FSB presence in the country during the riots. These reports cannot be confirmed, but it is not unrealistic to assume that a pervasive presence of Russian security forces exists in the country.

There are many reasons why Russia decided to target Kyrgyzstan. The country lies in a key geographic location nestled against China and Kazakhstan, and surrounds the most critical piece of territory in all of Central Asia: the Fergana Valley. Whoever controls Kyrgyzstan has the ability to pressure a number of states, including Kazakhstan, China, Tajikistan and Uzbekistan. Kyrgyzstan was also the scene of the 2005 Tulip Revolution, which ushered in President Kurmanbek Bakiyev, who is now sheltering himself in the southern regions of the country. It was not that Bakiyev was pro-Western like other color revolution leaders in Georgia and Ukraine, but he was available to the highest bidder and the United States was willing to pay.

The United States has maintained a transit center at the Manas International Airport — which serves as a key logistical hub for its operations in Afghanistan — since 2001. Though Russia has four — soon to be five — military installations in Kyrgyzstan, Manas is the only serious U.S. military presence in Central Asia. With a Russian-controlled government coming into power in Bishkek, Moscow now holds the strings over Manas. This gives Russia another lever to use against the United States within the larger struggle between the two powers.

“As of Wednesday, Russia has now added to its repertoire the ability to pull off its own style of color revolution with the toppling of the Kyrgyz government.”Russia’s main goal within that struggle is to have Western influence pulled back from its former turf — especially in the former Soviet states — and for the United States to accept Russian pre-eminence in the former Soviet sphere. But Russia is not just waiting for the United States to hand over its former turf. Instead, it has been actively resurging back into these countries using a myriad of tools.

Russia has long exerted its influence in the former Soviet states by attempting to ensure their economic reliance on Russia — as an integrated part of each country’s economy, and as an energy provider or energy transporter. This was seen in 2006 when Russia started cutting off energy supplies to Ukraine and also in Lithuania, to force the countries and their supporters in Europe to be more compliant.

Russia proved in 2008 that it was willing to use military force against its former Soviet states by going to war with Georgia. This move was particularly poignant since Georgia also had been a country turned pro-Western via a color revolution, and was pushing for membership into NATO. In early 2010, Russia showed that it could slowly organize forces in Ukraine to be democratically elected, replacing the pro-Western government elected in the Orange Revolution.

As of Wednesday, Russia has now added to its repertoire of tools used in the former Soviet states the ability to pull off its own style of color revolution with the toppling of the Kyrgyz government.

Russia has been systematically tailoring its resurgence into each country of its former sphere according to the country’s circumstances. This has not been quick or easy for Moscow. The overthrow of Kyrgyzstan has been painstakingly planned for nearly a decade to either flip the country back under Moscow’s control, or at least roll back U.S. influence and make the country more pragmatic to the Russian mission.

Russia knows there is no one-size-fits-all plan for its former Soviet states. The Kremlin cannot simply wage war with each country like it did with Georgia, cut off energy supplies like in Lithuania, set up a democratically elected government like in Ukraine or overthrow the government as in Kyrgyzstan. Now and going forward, Russia will tailor the type of influences it uses to each country it wants to control.

Reports circulated Tuesday that Russian Ambassador to the United Nations Vitaly Churkin issued complaints late Monday to members of the U.N. Security Council (UNSC) over Germany’s seizure of Russian cargo intended for the Bushehr nuclear power plant in Iran. There are few details about the cargo and its confiscation, and it is unclear when the seizure actually happened. Germany claims the shipment violated sanctions rules against transporting sensitive items to Iran.

The confiscation could be referring to an occurrence in January when Russian cargo, including computer and nuclear monitoring equipment, transiting Germany before heading to Iran was seized. This was followed by another related event in May when a handful of German businessmen connected to an unnamed Russian company working on the Bushehr nuclear facility were arrested in Germany by German authorities. On both occasions, German authorities claimed the offending actions violated sanctions rules against Iran.

Germany — the country that started the Bushehr project in 1975 — openly opposes further work and construction on the nuclear plant. Its opposition is in line with UNSC recommendations and the European Union’s directive against nuclear cooperation with Iran. As the political climate between the West and Iran worsened, Russia took up the Bushehr project in 1995 and has since used it as one of its main bargaining chips with the West on other critical issues.

“That Russia has not spun up the seizure beyond issuing informal complaints signals the fact that there could be something else afoot.”Moscow and Berlin could have split over the issue of Iran after the German businessmen working for the Bushehr-related Russian company were arrested in May. Germany and Russia had been growing closer over the past few years in terms of politics, economics and security, so it was rare for Germany to oppose any Russian projects, especially one as prominent as the Bushehr plant. But there has been little fallout between the budding friends over either incident. The seizure and Churkin’s complaints to the Security Council on Monday have barely registered in either Russian or German media.

That Russia has not spun up the seizure beyond issuing informal complaints — there are many higher profile officials other than Churkin who could have condemned the act — signals the fact that there could be something else afoot. Moscow could possibly have arranged the whole event.

Such a scenario would be connected to a recent shift in Russia’s stance on Iran. Russia is currently in the process of implementing a comprehensive plan to modernize its economy and Moscow feels that foreign investment and technology — particularly from the West and the United States — are critical to the process. In return, Russia has pledged to be more cooperative with the West on key political issues, proving its intent by signing on to the latest batch of UNSC sanctions against Iran, after years of opposing them. After a recent trip to Washington, Russian President Dmitri Medvedev even suggested that Moscow could be on board for even more moves against Iran should the Islamic republic prove to be noncompliant.

In a bid to placate a worrying Iran, Moscow has continued to maintain that it has not completely abandoned support for Tehran. But a significant test for Russia’s commitment to either the West or Iran is on the horizon; Moscow currently faces an August deadline to complete the Bushehr nuclear facility. Russia is already nearly two years behind the initial deadline for completion. As it faces pressure from the West to disregard the August deadline, Russia’s reputation as a solid economic and political partner to Iran is on the line.

But Moscow may think that with a bit of maneuvering it could do both. By claiming the West confiscated the material and personnel needed to complete Bushehr by the deadline, Russia would be cleared of its responsibility to meet that deadline. At the same time, taking the confiscation issue to the UNSC shows that Russia is not completely abandoning Iran (though this low gesture is not likely to placate Tehran much). If Moscow’s plan involves maneuvering to once again extend the Bushehr deadline, it would mean a coordinated effort against Iran by Russia, Germany and possibly the United States.

By THERESE RAPHAEL The protests in Russia this week put the government on notice that the rebellious mood on display in Sunday's parliament elections could well go viral, a message that clearly has the Kremlin nervous. It responded with riot police, mass arrests, and dial-a-mob pro-Putin supporters.

Russians have had much to grumble about for as long as anyone can remember. Yet they have always tended to shake their heads, but not their fists, at injustices. If things seem more serious now it may be because the scale and brazenness of the lawlessness have stretched tolerance to the limits. Sunday's parliamentary vote in Russia may not have changed the political landscape outright, but it revealed a lot about the growing desire in grass-roots Russia for political change.

The daily grind of corruption was something Russians viewed as the price for a kind of stability and the rise of living conditions, but crimes committed in broad daylight, the perpetrators known and protected by officials, have grown too numerous to ignore. Mr. Putin's United Russia Party is widely referred to as the "Party of Crooks [or Swindlers] and Thieves" (the reference will get you more than eight million hits on Google).

The protest really took off after September's announcement by Mr. Putin that he would stand again for president. The prospect of another 12 years of Putin rule and the insult of what is effectively a fait accompli exploded in anti-government tweets and blogs and hasn't stopped growing.

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The leader of the opposition Yabloko party, Sergei Mitrokhin, right, holds a Russian national flag during protests against alleged vote rigging in parliamentary elections..Recently, Russians have rallied around cases such as the killing of Sergei Magnitsky, a 37-year-old Russian lawyer representing Hermitage Capital Management, who was imprisoned, tortured and beaten to death in 2009 after accusing Russian officials in a well-documented case of perpetrating a massive tax fraud. Posters and videos mentioning the Magnitsky killing and others were a feature of protesters and those campaigning against the governing party this week. The full details of Magnitsky's imprisonment, mistreatment and ultimate death are set out in a 75-page report released last week to the President's Human Rights Council in Russia and to the public. The report was downloaded more than 200,000 times in Russia within a few days.

As with the cases of journalist Anna Politkovskaya, who was gunned down in 2006, and of human rights lawyer and investigative journalist Stanislav Markelov, who was murdered a mile from the Kremlin in 2009, Magnitsky's story resonates with Russians for the bravery of his actions to expose corruption and the brutality of his death.

"The Magnitsky case is one of the most emblematic examples of the breakdown of law in Russia," says William F. Browder, Hermitage's founder. "Unlike many other murder cases, where there is some plausible deniability about who pulled the trigger, here we have in such granular detail who was responsible and a chain of command that goes right up to the cabinet. Because of that, this is like a cancer that they don't seem to be able to get rid of. And the more they try to cover up, the more this becomes the Watergate of Russia."

The U.S. State Department imposed visa sanctions as of July this year on an unspecified number of Russian officials who it says were involved in Magnitsky's torture and death. A broader bill in the Senate, the Justice for Sergei Magnitsky Act of 2010, sponsored by Ben Cardin (D., Md.) and John McCain (R., Ariz.) and co-sponsored by 26 Democrats and Republicans, is due for hearings next week. There is a similar bill before the Canadian parliament and like-minded initiatives under way in 11 EU member states. The Dutch parliament unanimously passed a resolution in July calling on the government to impose visa sanctions on officials involved in Magnitsky's imprisonment and death (so far the government hasn't acted on that resolution).

It's tempting to draw a dotted line from the Arab Spring to Russia's winter of discontent, but Russian social bonds are far weaker than those in the Arab world, families are much smaller, and at least a share of the grumbling can probably be numbed away with the proceeds of oil and gas sales. Given the option of fighting for change or leaving, most Russians would probably opt to hit the road.

Many Russians are voting with their feet in what looks like the biggest wave of emigration since the Bolsheviks came to power. In a Levada Centre poll in May, 22% of respondents said they wanted to move abroad permanently, compared to 13% two years earlier. A conservative estimate provided by the national audit office, which tracks tax receipts, is that 1.25 million Russians left in the last decade.

Nor are these largely economic migrants. Estate agents and private-school heads in London, Switzerland, Spain and elsewhere can readily testify to the growing demand from well-healed Russian clientele, while neighborhoods of the ultra-rich such as the fabled Ryublovka region outside of Moscow have seen an exodus. Unlike earlier waves of emigration, Russians leave these days to find a bit of peace and normality. They are materially well-off in Russia, but they are unhappy.

Unable to change a system where power is preserved through patronage and illegality, the government seems bent on trying to change the subject, much as the Communists once did. When Mr. Putin was booed recently as he went on stage to congratulate the winner of a martial-arts competition, Russian television edited out the snub. Coverage of the protests downplays their significance, just as state-controlled media went to great lengths to minimize coverage of the uprisings in Egypt and elsewhere in the Middle East. Mr. Putin, meanwhile, is often shown shirtless, in dark sunglasses or martial arts attire.

Mr. Putin will no doubt seek in the months ahead to portray his government as stable, fair and above all generous. But dissent seems to be stealing a march on the culture of compromise among many ordinary Russians and among the better-off. The result of March's presidential election may be foregone, but regime change in countries where democracy is not respected doesn't necessarily respect the electoral calendar.

Ms. Raphael is a former editorial page editor of The Wall Street Journal Europe

Colin Chapman: Russia’s Prime Minister Vladimir Putin says he’s going to allow protesters to hold a very large rally in Moscow on Christmas Eve. It’s a bold step from the man who wants to regain the presidency next March but whose United Russia party saw its vote fall below 50 percent in recent Duma elections. So have we all overrated Putin?

Welcome to Agenda with George Friedman, and joining us also our chief Eurasia analyst Lauren Goodrich. Now in the new year, Vladimir Putin and the United Russia party will be campaigning for Putin’s bid to retake the presidency. How do you expect them to adjust their strategy to take account of this recent challenge to Mr. Putin’s political monopoly?

Lauren Goodrich: Well Putin is going to have to address the protesters, and what the protesters are looking for is for the middle class to actually be heard for the first time in Russia — they have never had a voice; they have never had a leader and they never had anyone to represent them in the government. And so Putin at first is going to have to go to the protesters themselves and then there will have to be some structural changes within the party system.

George Friedman: I think the more interesting question here is: has the narrative on Vladimir Putin been right? There has been an assumption here that Putin could decide whether or not he or Medvedev would run, and that he was certainly going to win if he ran. I’m not really interested in these demonstrations nearly as much as I am in the electoral results. Rather than being preeminently dominant over the electorate, Putin didn’t do very well. There are a bunch of theories out there about how Putin planned to not to do so well and that, you know, this is really a brilliant strategy showing that this is really a democratic society and he’s in complete control. The other explanation is he really isn’t as popular as we thought. We at STRATFOR have been talking about Putin as a preeminent force and I begin to wonder whether we have to reexamine that, he may be weaker than he appears. Demonstrations always get a lot of attention and everybody focuses on transcendental meanings of that. Now let’s look at the numbers in that election.

Lauren: Well the numbers in the election is what is really interesting because the parties that rose and took United Russia’s seats in parliament they’re the nationalist parties, they’re the ones that are “Russia for Russians”, they want to take a harder stand in the country, a more nationalistic stand inside the country, and so that’s the Communists and the Liberal Democrats who did better. The other interesting thing is that among the minorities in Russia, especially in the caucuses, United Russia took almost all of the votes among minorities. It was the Russian population that decided to vote for the nationalists instead.

George: And then leaving out the question of Putin — you know, the personality — you’re seeing a serious split developing between the Russian population and non-Russian population, and this may well presage some serious tensions. But certainly it seems to indicate that Russia is far less united than United Russia would like to think and Putin’s position is not so obviously paramount. And without Putin this regime looks very different. So all I’m saying is that I was brought up short by the numbers, they weren’t what I expected. Granted, we can say that it’s a movement to the right rather than to the left. I’m not sure that any of us should be comforted by that.

Lauren: But that’s the difference is that the election results show a swing towards nationalism, versus the protests which weren’t nationalist protests. And so they’re two separate issues.

George: Well protests are held by whoever decides to show up. I mean, we in the West have this obsession with the assigning excessive significance to demonstrations. Demonstrations happen. People come out and demonstrate. It doesn’t show much at the elections, which were pretty much fair, people said some were. The election showed us something very different. So what we learned is that the demonstrators were from the left and the electorate was moving to the right.

Colin: How seriously should we take the statement by Mikhail Prokhorov that he’ll run against Putin? Could this just be a ruse?

Lauren: Well what I find most interesting about Prokhorov’s announcement is what happened right before the announcement. A few days before Prokhorov made his announcement Vladislav Surkov — who is Putin’s right hand — made a very public speech, which he doesn’t do very often. And in that speech he said that Russia needs a new political player in order to be in front of the middle class and also to represent big business inside of Russia. And then all of a sudden, two days later, you have Prokhorov make his announcement.

George: The problem of this announcement was that it looked more like an attempt by somebody not necessarily violently opposed to Putin to preempt the space that was opening up. The space is there on the right, as you said. And no right-wing personality has really emerged to really challenge that. This was an attempt to show an opposition. So it may have been a response to the elections. So you could both say that Prokhorov is not a particularly significant player in this but that Putin has some serious problems anyway.

Lauren: But if we’re looking at a swing to nationalism and then the West has created this narrative that Putin is losing power inside of Russia, whereas the polling numbers even going into the elections are exactly the results that happened. So anyone actually looking at the numbers would have seen that this was going to be the result — except the West has spun the narrative in a different way, bringing Prokhorov in so that the narrative is very interesting because he is very pro-Western, he’s liked in the West, he’s bigger than life here in the West. And so it kind of is a red herring to divert the West’s attention to Prokhorov instead of actually looking at what happened in the polling numbers.

Colin: Well, can I now move you on to the issue of corruption? More times than I think I can remember I’ve seen the expression “a party of crooks and thieves ascribe to this United Russia party,” and there has been quite a lot published in respectable newspapers like the London Financial Times about crony capitalism and well-rewarded oligarchs from St. Petersburg known to be close to Putin.

George: Well in the first place — and it’s really interesting that the Financial Times discovered crony capitalism in Russia, as if this was something new — this is the way Russia works. In part it works this way because of the way it privatized, and in part it works this way because Western interests were involved in that privatization. So this is Russia. It is not Britain, it is not Australia, and I’m glad the Financial Times realized that.

The problem that you have here is, however, that whatever comes out will be somehow linked to crony capitalism. But what is the ideology that it represents? I think what Lauren has pointed out, which I think is very important, is that unlike previous expectations — which have always been that Putin is the hard right guy and off in the wilderness is the guy in the white suit who’s really nice, liberal and a Minnesota Democrat — what we really find here is that what the opposition looks like is Communist and nationalist and much stronger than anyone would have thought of. The crony capitalization is not the issue on the table this day. What appears to be an issue is Putin — or something to the right of him — and not at all what we would have expected or wanted in the West, which is someone more like us.

Lauren: So there’s a split narrative going on of what the West is saying versus what is actually happening on the ground.

George: And that split is always there because the interesting thing of the past few years is that the West is constantly inventing liberalizing movements — whether it’s the Arab Spring or uprisings in Thailand — somewhere in the world there’s a liberalizing movement. The ability to get your arms around the idea that in many of these demonstrations and risings you’re not seeing liberalization but a hardline element coming out, frequently motivated by ethnic or racial issues, as in this case. For that we must also admit that nothing is definitive yet in Russia. This is a small thing that happened and we can build a large edifice out of what it means, but it’s an interesting thing that happened.

Lauren: And it’s also that the protests that just happened that look like they’re anti-Putin was just one set of protests, where the Russia for Russians protests and the nationalist protests have been happening every single week, and they’ve been growing in number to where you’re seeing 50,000 people on the streets versus 15,000 of the anti-Putin group.George: It is very interesting, selectively, what is covered in Russia by the Western media and it’s things that comfortably fit into the vision of what ought to be happening. The more uncomfortable realities are not viewed and this election is really the case.

Colin: Now, let’s just conclude by talking about an anniversary. It’s almost 20 years to the week since the collapse of the former Soviet Union. Now Putin is saying he’ll build a Eurasian Union with former Soviet republics. Is this an achievable policy goal, given both the economic cost and the pushback from those who have tasted freedom?George: Well, I’m not sure that there is an economic cost that large. From Putin’s point of view, the failure of the Soviet Union really consisted of the fact that Moscow guaranteed the economic interests of all of the constituent republics and huge amounts of money were flowing out from the center to these constituent republics. This union guarantees nothing. This union does not guarantee that Moscow is going to underwrite anything that the Ukrainians need, or the Belarusians or so on. It simply says that they’re going to be aligned. So this is very different from the Soviet Union.

Is it doable? Yes it’s doable, in part because Europe is collapsing and because any hope on the part of Ukrainians or anyone else that they’re going to get into the European Union (EU) in any meaningful time period has gone away. And so whereas in a country like the Ukraine, where Europe — however distant — appeared to be an option, you’re suddenly living in a world where that’s not an option, your options are limited, and in the end they center around your old partner and not particularly good friend — the Russians. So the real question is: 1) is it going to cost the Russians anything? I think they’ll profit from it; 2) Will it be possible? I think there’s very little alternative for many of these nations.

Lauren: And it’s already rolling as well. This next year we’re going to see a very important step to create this Eurasia Union. The customs unions are going to start to become a new organization and it’s also going to start expanding from being just Russia with Belarus and Kazakhstan to also start taking in quite a few other former Soviet states. So the ball is rolling on this.Colin: Lauren Goodrich and George Friedman, thank you very much for your insights on Russia. I’m Colin Chapman. That’s Agenda for this week, thanks for being with us.

It looks triumphant: Vladimir Putin’s portrait hanging over a peaceful commercial street in Grozny, the capital of a Chechen Republic he went to war to keep as part of Russia. The boulevard was even given a new name to reinforce that impression of conquest; what was once Victory Avenue, marking the Soviet Union’s defeat of the Nazis in the Second World War, is now called Putin Avenue.

Beneath the portrait, something has indeed been accomplished. Where once there was only rubble (I stood on Victory Avenue in wartime 10 years ago and failed to find a single building undamaged by heavy weapons fire) is now a tree-lined boulevard framed by marble-fronted buildings housing cafés, pizzerias and advertising agencies.

When Russian voters returned Mr. Putin to the presidency last week, they did so in part because he is seen as having brought something like stability to Chechnya after almost two decades of no-holds-barred warfare here that often and horrifyingly spilled over into Moscow and other Russian cities. But in Grozny, it feels like it’s the Chechens – not Mr. Putin – who got what they wanted from the wars.

Chechnya today is ruled by Chechens under a form of Islamic law. Russia has maintained its territorial integrity, but the Russians who lived here once are gone, and few have any desire to ever see Grozny again. It’s easy to wonder whether two wars and some 160,000 deaths could have been avoided if the two sides had been willing to accept the awkward compromise they have now.

It’s Ramzan Kadyrov, a one-time rebel whom human-rights groups accuse of murder and torture, who really rules Chechnya. (At the south end of Putin Avenue is the city’s main Kadyrov Square, where a neon sign reads “Thank You Ramzan for Grozny!”) He maintains something resembling stability through a constant display of arms – Kalashnikov-toting police direct traffic in the city – and by dispensing billions of rubles from the Kremlin treasury, the price Moscow pays to have Mr. Kadyrov do the dirty work of fighting Chechnya’s remaining Islamic militants.

Another part of the Faustian pact Mr. Putin struck with Mr. Kadyrov was laid plain during the presidential election. According to the official count, an astounding 99.7 per cent of Chechens cast their ballots for Mr. Putin, though it’s easy to find those who say they voted otherwise or not at all.

Stuffed ballot boxes and Putin portraits aside, the state Mr. Kadyrov is building more closely resembles a Middle Eastern sultanate than any part of the Russian Federation. Facets of sharia law are in place – it’s the only part of Russia where alcohol isn’t freely bought and sold, and women who work for the government are required to wear head scarves. And the previously flat skyline is taking on a taste of Dubai, with a clutch of soaring skyscrapers and one of the largest mosques on the continent. The lone portrait of Mr. Putin is outnumbered by hundreds of smiling pictures of Ramzan and his father, Akhmad Kadyrov, the former Chechen president who was assassinated in a 2004 bombing as he sat in the VIP bleachers of the city’s main soccer stadium.

“I was a child of war. There was nothing good in our lives. Today, people come here from other republics to shop,” said Zalina Bisayeva, the 25-year-old manager of a boutique that sells Chechen-designed men’s and women’s clothing. “Everything is better now thanks to our President, Ramzan Kadyrov.”

Most jarringly, other than a military base beside Akhmad Kadyrov Airport, there are almost no Russians to be seen. (In a cruel twist of fate, nearly all of the 200,000 Russians who once lived here were killed or driven out by their own army's repeated sieges of the city.) The signs on the streets are still in Russian, but the language of life is Chechen. (Click 'next page' at the link.)

Editor's Note: This is the first installment of a five-part series on Russian society and identity. Part 1 examines the overall problems facing the Kremlin as it attempts to consolidate Russia's diverse population.

Amid rising political, ethnic and generational tensions in Russia, Russian President Vladimir Putin has ordered his Cabinet to devise a national social and ethnic policy by Dec. 1 -- the first attempt to do so in 16 years. Russia is an incredibly diverse country in terms of its ethnic, religious, economic and political spheres. Throughout the country's history, leaders have made only three attempts to define and unite the many peoples of Russia under a common identity: once under Czar Nicholas I, once under the Soviet Union and now under Putin.

The current stereotype of a Russian citizen is a white, Slavic, Orthodox ethnic Russian who accepts the Kremlin's political system. Although this may be true for the majority of the country, notable ethnic, religious and political shifts are occurring in Russia that are forcing the Kremlin to develop new social policies in order to accommodate an increasingly diverse population -- and to reconsider the country's age-old problem of defining the Russian identity.

Throughout its history, Russia has sought to expand to defendable borders. The core of the country, which runs from north of Moscow down through the Volga region, holds the bulk of its population and food supply but is indefensible. Thus, for more than 500 years, Russia has worked to expand its territory to defendable geographic anchors, such as the mountains of the Caucasus, the Carpathians and the Tien Shan. Russia has also pushed out along the vulnerable North European Plain, one of the most critical routes for outsiders wishing to invade the country. These efforts have created a large buffer region surrounding the country's heartland. However, it has also meant that Russia has absorbed large populations that were not ethnically Russian or were hostile to Moscow. Russia's struggle to defend its territory from invasion has thus created the challenge of consolidating its internal population.

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Russia now has 21 national republics and 85 regional subjects spanning nine time zones. The country's population is currently divided between urban and rural residents, 185 ethnic groups, four major recognized religions (Orthodoxy, Judaism, Islam and Buddhism) as well as countless other faiths, and a growing number of political affiliations. Cross-border identification has also created divisions among populations found along Russia's shared borders.

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Ethnic Russians make up the bulk of the country's population and have been the ruling class since they broke away from the Mongol and Muslim Tatar empires in the 16th century. Because their territory spans from the Baltic Sea to the Pacific Ocean, the ethnic Russian rulers have power over millions of non-ethnic and non-Orthodox Russians, including Mongol, Turkic, Finnish and Inuit peoples, among others. And this is just inside Russia's current borders; the territory controlled under the Russian Empire and the Soviet Union included large additional regions of non-Russians. Moreover, the size of Russia's territory has allowed foreign influence to shape regional cultural values and traditions; for example, western Russia identifies somewhat with the West and Europe, eastern Russia identifies with Asia, and southern Russia is influenced by the Islamic world.

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Such divisions create struggles among various groups and between these groups and the state. Although regional and ethnic loyalties can create conflict, they can also create kinship, helping unified minority populations to consolidate against the ruling class. An example of this occurred in the 1800s and the 1930s, when Russia attempted to consolidate control over what is today Uzbekistan. During both attempts, Uzbek populations were divided into clans that fought bitterly with each other but united in order to resist Moscow's rule.

With so many different identities in Russia, divisions typically are overcome only by ideology or administration. The Russian government's most successful period of control occurred during the Soviet era, when Moscow created an identity that could supersede the diversity within the empire and unite the population while creating an administrative system to organize the people and repress dissent. Putin has said that this strategy was one of that era's greatest achievements.

===============Reassessing the Russian Identity, Part 5: Faith, Age and the New Russian

Editor's Note: This is the fifth installment of a five-part series on Russian society and identity. Part 5 discusses the current religious and generational divisions in Russia and the creation of a new Russian identity. Read part 1, part 2, part 3 and part 4.

Moscow's secular stance regarding religion and the state has grown less definite again for quite a few reasons. During Boris Yeltsin's leadership of the Russian Federation, the state did not enact many policies regarding religion. Yeltsin did want religion limited, out of concern that foreign influence would seep into the country via diverse religious groups. He barred many foreign religious groups from entering the country unless they were Orthodox, Islamic, Buddhist or Jewish, but after that, religion was not a high priority for Yeltsin.

Russian leader Vladimir Putin intensified a revival of the Orthodox faith in the country, using it (much as the czars did) as a unifying force among the ethnic Russian people. But in recent years, this support for Orthodoxy has escalated beyond Kremlin control. During Putin's era, xenophobia -- particularly against Muslims of any ethnicity -- skyrocketed as well and overlapped with newfound loyalty to the Orthodox Church. Moreover, although many Muslim populations could band together during times of war with the state -- as seen in the Northern Caucasus in the mid-2000s -- currently there are divisions among Russia's Islamic populations as well. Overall, the country is experiencing a social instability based on religious affiliation not seen for some time in Russia.

The Rise of Ultra-Orthodoxy

Although the issue is nearly impossible to quantify, there seems to be anecdotal evidence of a notable escalation in extremism within the Orthodox faith in Russia. Between 70 and 80 percent of Russians claim to be Russian Orthodox, although most are non-practicing (a remnant from the Soviet period). Both Putin and former President Dmitri Medvedev heavily promoted Orthodoxy, and the church became one of the most important tools the Kremlin has used to unite society, at least among the ethnic Russians. But now that the Kremlin has pushed for the Church to have a greater presence in the country, some Russians' pro-Orthodoxy sentiments are escalating to extremism as the population reacts to generational and demographic changes in the country.

The more fervent Russian Orthodox sentiment seems to be rising in tandem with general xenophobia. The historical movement of "Russia for Russians" continually springs up in times of crisis in Russia, such as it did when ethnic Russians united during the wars in Chechnya. However, the current movement is not coming during a real crisis; it has resurfaced during the past two years. In November 2011, hundreds of thousands of Russians marched to protest increased immigration and the government's commitment to economically subsidizing Russia's Muslim republics in the Northern Caucasus. Orthodox fundamentalism spiked again in the summer of 2012 when the anti-Kremlin punk band Pussy Riot and its supporters held a series of demonstrations and defilements of Orthodox churches and symbols.

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Love of One's Own and Importance of Place

In response to the demonstrations against the Church and rise in anti-Muslim sentiment, volunteers have formed so-called Orthodox Brigades to actively patrol the streets to defend the Church. These brigades -- mostly comprising youth clad in black shirts that read, "Orthodoxy or Death" -- have been seen in dozens of cities across Russia over the past year and have sparked concern for minority populations. The governor of Krasnodar, Alexander Tkachev, has already formed a 1,000-strong brigade, saying that he will help finance it and that its members will work with local police to secure the streets. The Chechen parliament voiced opposition to Tkachev's move.

The Russian Interior Ministry has dismissed the brigades, saying that the Russian government will not work with them. Instead, the Kremlin is trying to harness the brigades' enthusiasm but shifting their focus away from purely Orthodox issues by creating "International Brigades" which will patrol the streets to help maintain order. The goal is to co-opt the Orthodox Brigades and expand them to include other ethnic groups -- something that the Union of Chechen Youth has said it will take part in. This, in theory, will help dissipate the brigades' Orthodox extremism.

Fissures Within Islamic Communities

Shifts inside Russia's indigenous Islamic communities have also occurred. As noted above, growth is taking place among key Muslim ethnic populations, such as Chechens, Ingush and Dagestanis -- the Muslim populations ethnic Russians tend to be most xenophobic about. There is a history of violence among these populations, which are located in the same region of the Northern Caucasus. It was the Chechen invasion of Dagestan in 1999 that sparked the Second Chechen War with the Russian state -- a war that did not end officially until 2010. Russia still carries out major military operations in the Caucasus, mainly focusing on Dagestan now that Chechnya is largely stable.

But rifts between these groups are in the forefront of the Kremlin's mind as issues regarding power in the region resurface. Chechen President Ramzan Kadyrov has stated that he is the protector of the peoples of the Caucasus and wants to leverage that into gaining more land for Chechnya, with hopes that Chechnya will swallow up Ingushetia first and possibly other Northern Caucasus republics later.

Another issue is an increase in tensions between various clans within the Sufi and Salafist Muslim populations. The majority of Russia's Muslims are of the liberal Islamic sect of Sufism. During the Russian wars in the Northern Caucasus over the past two decades, a radical element called either Wahhabism or Salafism became more prominent. During the Second Chechen War, the Russians pitted the Muslims fighting for nationalist reasons against those who were more oriented toward the Islamist ideology -- a tactic that was largely successful and created a nationalist Islamic population in the Caucasus willing to work with Moscow.

But with the wars over and with regular extremist activity still occurring in the Northern Caucasus, problems are arising among the different ethnicities and between the Sufis and Salafists. Such problems are also moving outside of the Caucasus. Four major plots targeting high-level Sufi imams in Dagestan by Salafists have occurred since October 2011, and three of the four imams targeted were killed. The latest Sufi leader targeted (in August), Sheikh Said Afandi, was working on a peace negotiation between the two groups. A similar incident took place in Tatarstan in July when a coordinated attack targeted the chief mufti of Tatarstan and his deputy. The current theory is that the attack was motivated by the Salafist-Sufi divide in Tatarstan. These sorts of incidents are not just religious in nature; they also have political motivations.

There is also a question of how susceptible the new generation of Muslims in Russia is to outside or radical sentiments. With 20 percent of Russians (ethnically Russian or not) born after the fall of the Soviet Union, a large portion of those Muslims in that age cohort have known only conflict, since a series of wars has occurred in their region for nearly 20 years. This could make them more vulnerable to outside or radical sentiment. On the other hand, that generation could want to move past such conflicts and adopt the more Russified attitude found in places like Chechnya under pro-Kremlin leader Kadyrov.

One attempt to combat extremism among Muslims in the Caucasus is the Chechen government's implementation (in tandem with the Kremlin) of its own brand of Islamic teaching in schools for very young and teenage students. This plan is just beginning and is using materials prepared by local religious leaders. Nearly all Chechen students are now taking courses on Islam and on how to behave as a Muslim.

The goal for the Kremlin and Kadyrov's government is to instill a version of Islam that can isolate those extremist views against the government and Kremlin-sanctioned society. Many in Chechnya have said that this plan strengthens Kadyrov's position in the Russian Northern Caucasus, since he is overseeing religious affairs and that Kadyrov is attempting to make Grozny the center of Russian-Islamic affairs.

It is too early to see what effects such educational programs will have. Islam has not been taught in schools in the Caucasus until now, so either it could unify the new generation of Muslims in one view of Islam or it could aggravate more radical movements who want to teach their own versions of the religion.

Political and Generational Changes

VIDEO: Russia's Demographic Challenge .While ethnic and religious sentiments have shifted, so has the basic political mood -- though much of it is tied to the previous two issues, since they are all interwoven. Russia's typically steady political landscape was shaken in December 2011 when a series of mass protests across Russia started. The demonstrations initially were against parliamentary election results, but they continued through March and the presidential election. Now, numerous protests occur regularly and new political parties and coalitions are forming -- and it is all taking place very publicly.

After a decade of chaos in Russia, Putin consolidated much of the country with a series of sweeping political, economic and social reforms centering on his leadership. But as the series of crises -- such as the 1990s economic crisis and the wars in the Northern Caucasus -- that helped lead to Putin's rise and strengthened his ability to rally the country started to level off, the country began to prosper and the need for such a heavy-handed leader diminished.

Moreover, a generational change is taking place in Russia. Of the current population in Russia, more than 20 percent was born after the fall of the Soviet Union. This population was never Sovietized or united under one identity. Most of this population also lived its formative years in a stable and strengthening Russia under Putin. It is part of this population that is leading the push against government control of the country. The Kremlin has already begun countering this so-called rebellion by co-opting parts of the anti-Kremlin political movements, crushing others and dividing many of them.

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The Kremlin also is not trying to use one political party to rule over the country and unite the people politically, as the Communist Party did during the Soviet period. Instead, Putin has put forth the idea of a coalition of parties, groups and unions spanning the political spectrum -- though all under Putin's guidance. The All Russia Popular Front theoretically is meant to include any person or entity in the country supporting the betterment of Russia. Also known as the Popular Front, the movement has been slow in garnering support, though Putin has shown new enthusiasm in the past month in promoting the Popular Front.

Political dissent has always ebbed and flowed inside Russia, and although most Russians rallied behind Putin as the country's "savior" a decade ago, that sentiment has diminished. Putin is using many different tactics, from crackdowns to the creation of new political movements, to counter this. Moreover, Putin and his government are looking for a new way to unite the people -- particularly a way that will transcend personality and become part of the country's psyche. Putin wants to create a new Russian identity.

Formulating a New Identity for Russians

With so many serious divisions among the Russian people -- demographic, ethnic, religious, political and generational -- the need for a unified Russian identity to supersede all those differences has come back up for debate once again. In August, Putin said, "In the Soviet period a lot was done that was not very good, but a lot of good things were invented. For example, there was the concept of the Soviet people, a new historical community." Since then, there has been a debate on how to form a new identity for the current set of diverse people in the country. Putin has issued a presidential decree ordering his Cabinet to come up with a National Social and Ethnic Policy Strategy by Dec. 1.

The two Kremlin figures put in charge of this effort are Russian State Duma Chair Sergei Naryshkin and Deputy Premier Vladislav Surkov. Naryshkin is one of Putin's most trusted political allies. He reportedly served in the KGB then moved with Putin into the St. Petersburg circle of current Kremlin power players. Naryshkin is typically moved to positions where Putin needs a serious strategist; he has served as Gazprom adviser, military naval adviser, media chief and head of Russia's economic relations with the Commonwealth of Independent States, European Union and Far East. Surkov is a more controversial Kremliner. Not only is he half-Chechen and half-Jewish, he also formerly led the Kremlin clan of the civiliki. Surkov has experience in shaping some important initiatives, such as the Nashi youth program and the Kremlin's relationship with Chechnya.

The new social policy is meant to replace the vague 1996 strategy implemented by Boris Yeltsin. The initial drafts of the new strategy say that Russia is a "unique socio-cultural civilization entity formed of the multi-people Russian nation." Notably, the drafts of their new policy have removed the concept of the importance of ethnic Russians in the country.

Instead the focus will be on a multi-ethnic nation, with a proposed ethnic policy strategy that involves a covenant between all nationalities in Russia. The document is already getting quite a bit of attention, with support from Muslims -- ranging from imams to social and cultural groups -- in Chechnya and Tatarstan and the Armenian diaspora. More nationalist ethnic Russian and Orthodox groups have slammed the strategy, as they do not want a policy of inclusion for foreign or non-ethnic Russian groups.

Duma Deputy and member of the Presidential Council for Ethnic Relations Alexei Zhuravlev has proposed that the strategy as a whole should be sent to the Russian people for referendum in 2013. Putting the issue up for a public vote is risky because of the social, political and ethnic divisions among Russia's many peoples.

These divisions are exactly what this new strategy is trying to address, though no long-term answers to such dilemmas have been found in Russian history, except the brutal forced Sovietization of the people under Stalin. But with rifts in the population deepening like never before, the Kremlin has no choice but to try unifying the country, even if the plan is only marginally successful..

Read more: Reassessing the Russian Identity, Part 5: Faith, Age and the New Russian | Stratfor